“The Federal Reserve System, or Fed, is the most important regulatory agency in the U.S. monetary system” (333). The monetary policies used by the Federal Reserve are designed to control the rate of growth and size of the money supply, which affects interest rates. “When the Fed takes actions, it is trying to influence investment, consumption and total aggregate expenditures” (352).
The Federal Reserve system can use either an expansionary or contractionary policy in their efforts to keep the macroeconomy as stable as possible. The four tools used to help with these efforts are: “open market operations, changes in the reserve ratio, changes in the interest rates paid on reserves, and discount rate changes” (352).
When they initiate an
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The indirect benefits result from the increased amount money people and firms place in savings accounts. The increased funds that financial institutions now have resulted in an excess amount of reserves that banks are willing to lend for further investment. With lower interest rates, businesses and individuals will be more willing to seek funds for investment and the purchase of durable goods. “The increased loans generate a rise in aggregate demand” (354). The added purchases have a trickle effect on the economy with “more people being involved in more spending” …show more content…
The first is called “transactions demand, which is holding money as a medium of exchange to make payments” (350). In other words, people hold money to make expected purchases of goods and services between paydays. The benefit of holding funds is its convenience. It is convenient to have the funds needed for purchases instead of having to cash in nonmoney assets for every purchase they want to make. The convenience comes at a price, however, and that is lost interest earnings.
“People also hold money to meet unplanned or unexpected purchase and emergencies which is called precautionary demand” (350). Interest rates affect the amount of money people wish to hold in these funds. “The higher the interest rate, the lower the precautionary money balances become” (350). “The last influence is that people choose to hold money as a store of value instead of other assets, such as corporate bonds and stocks, for two reasons: its liquidity and the lack of risk. This leads to the Asset Demand for money”
When interest rates on loans are high, this leaves people with less disposable income resulting in less consumer spending. Depending on where the economy stands, this can be good or bad, as it would lead toward recession. But that may be exactly what is intended in order to decrease spending if the economy is currently experiencing over-inflation. The government may intentionally send the market into a recession rather than potentially risking too high levels of inflation. On the other hand, if the economy were already in recession this would only make the recession worse. In the situation where the economy is currently in recession, the government is instead going to change the overnight rate in order to therefore lower interest rates on loans in order to provoke consumer
It made benchmark interest rate remains low. Then the excess liquidity made the asset bubble. Finally, the burst of asset bubble thumped the financial system. (Pierpaolo,B and Woodford,M, 2003)
Monetary Policy is another policy used in Keynesianism which is a list of protocols designed to regulate the economy by setting the amount of money that is in circulation and controlled interest levels. The Federal Reserve system, also known as the central banking system in the U.S., which holds control of this policy. Monetary policy has three tools used by the Federal Reserve to enforce this policy. Reserve Requirement is the first tool that determines the lowest amount of money a bank must possess and is not able to lend out. The second way to enforce monetary policy is by using the discount rate or the interest rate a bank will charge.
The other two tools that can be used by the Federal Reserve apart from the Open Market Operation are the discount rate and reserve requirements. The three tools mentioned can change the federal funds rate. The discount rate is used to help the depository institution with its liquidity problems and there are three discount rates that the banks can use depending on their requirements, they are primary credit, secondary credit and seasonal credit. In addition, reserve ratio has help banks with stability and financial stress by having depository institutions to reserve amount of funds in the form of vault cash or deposit in the Federal Reserve Banks.
Over the past few years we have realized the impact that the Federal Government has on our economy, yet we never knew enough about the subject to understand why. While taking this Economics course it has brought so many things to our attention, especially since we see inflation, gas prices, unemployment and interest rates on the rise. It has given us a better understanding of the effect of the Government on the economy, the stock market, the interest rates, etc. Since the Federal Government has such control over our economy, we decided to tackle the subject of the Federal Reserve System and try to get a better understanding of the history, the structure, and the monetary policy of the power that it holds. The Federal Reserve System is the central banking authority of the United States.
People tend to try and predict what their future needs will be in order for them to be able to satisfy their current and future wants. The two-period model of intertemporal choice tries to interpret based on the current time period (e.g. this month) and a prediction of the future time period (e.g. next month) what consumers will be able to spend, borrow or save according to their levels of income and interest rates. In this assignment however we are mostly concerned on the changes of interest rate and specifically the impact an increase in the level of interest rates would have to consumers who are either savers or borrowers in the first period and how would that affect their consumption levels.
In the study of macroeconomics there are several sub factors that affect the economy either favorably or adversely. One dynamic of macroeconomics is monetary policy. Monetary policy consists of deliberate changes in the money supply to influence interest rates and thus the level of spending in the economy. “The goal of a monetary policy is to achieve and maintain price level stability, full employment and economic growth.” (McConnell & Brue, 2004).
The term Monetary policy refers to the method through which a country’s monetary authority, such as the Federal Reserve or the Bank of England control money supply for the aim of promoting economic stability and growth and is primarily achieved by the targeting of various interest rates. Monetary policy may be either contractionary or expansionary whereby a contractionary policy reduces the money supply, reduces the rate at which money is supplied or sets about an increase in interest rates. Expansionary policies on the other hand increase the supply of money or lower the interest rates. Interest rates may also be referred to as tight if their aim is to reduce inflation; neutral, if their aim is neither inflation reduction nor growth stimulation; or, accommodative, if aimed at stimulating growth. Monetary policies have a great impact on the economic stability of a country and if not well formulated, may lead to economic calamities (Reinhart & Rogoff, 2013). The current monetary policy of the United States Federal Reserve while being accommodative and expansionary so as to stimulate growth after the 2008 recession, will lead to an economic pitfall if maintained in its current state. This paper will examine this current policy, its strengths and weaknesses as well as recommendations that will ensure economic stability.
At the time, there were not adequate facilities available to meet the demand for additional funds. Bank’s reserves of money were stored around the nation at 50 locations. The reserves were not able to be shifted quickly to the areas that were experiencing increases in withdraw demand. The immobility of reserves only added another element to the financial panic (Schlesinger pp. 41). The credit situation would become tense. Since the banks coul...
...uggests that the spread of the money form gives individuals a freedom of sorts by permitting them to exercise the kind of individualized control over "impression management" that was not possible in traditional societies. ... ascribed identities have been discarded. Even strangers become familiar and knowable identities insofar as they are willing to use a common but impersonal means of exchange. (Ashley and Orenstein, p. 326)
When decisions bases on a consumers finances have following consequences further than the near future, then an individuals' success economically could depend on the ability they have to foresee the upcoming rate of inflation. according to statistics, higher expectations for inflation were reported by females who were poorer, they were single and they were less educated. More specifically, higher expectations for inflation were reported by people who focused more-so with how they can cover future purchases and expenses and the prices they will pay, and by ones who have lower knowledge on financial literacy.
Money has evolved with the times and is a reflection of the progress of man. Early money was a physical commodity, grain, gold or silver. During the vital stage, more symbolic forms of money such as certificates of deposit, bank notes, checks, letters of credit, bonds and other forms of negotiable securities came into prominence. Social development transformed money into a trust, “In God We Trust' it says on the back of the ten-dollar bill.” (The Ascent of Money, 27)
Money supply is the availability of money in the hands of the public (economy) that can be used to purchase goods, services and securities. In macroeconomics, the price of money is equivalent to the rate of interest. There's an inverse relationship between money supply and interest rates. As money supply increases, interest will decrease. On the other hand, interest will increases as money supply decreases. It is very important to understand that the economy works at market equilibrium. There are several factors affecting money supply; and these contributing factors will be the main focus of this paper. Understanding the basic principle on money supply is imperative to have a good grasp on the macroeconomic impact of money supply on business operations.
Interest rates and the effects of interest rates on the economy concern not only macroeconomists but consumers, savers, borrowers, and lenders. A country may react and change their interest rates, according to the prosperity of their economy. Interest rates, is the percentage usually on an annual basis that is paid by the borrower to the lender for a loan of money (Merriam-Webster). If banks decided not to use interest rates, it would be impossible for others to be able to take out loans and therefore, there would be far less spending money in the economy. With interest rates, this allows banks to take a percentage of the consumer’s money and loan it out to others, thus allowing economic growth to be possible. Interest rates also allow lenders to have a “safety net” which is necessary because there is a possibility that the borrower would be unable to pay back a loan to the bank. A nation’s interest rates can be raised or lowered and these shifts in interest rates correlate directly to aggregate demand. Aggregate demand, is the total demand for final goods and services in an economy at a given time (Business Dictionary). A nation uses interest rates for economic growth or to help prevent inflation. When economic growth is needed a nation would lower their interest rates. However, if a country is concerned about inflation, they may choose to raise their interest rates. When interest rates, raised or lowered, will have a negative or positive impact on consumers, and have a positive or negative impact on investors.
The invention of money was a major improvement in peoples’ lives. In the past, people usually had to travel all day to find the person who is willing to exchange their goods. In addition, the goods people want to exchange did not have the standard value of measurement. This led to unequal exchanges. Furthermore, it is not convenient to carry heavy goods from one place to another for an exchange. To solve these issues, money will be the only solution. Later, people tend to develop money from cowry shells to credit cards for the convenience and to improve their society.