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This essay will discuss monetary policy and its impact on macroeconomic factors, as well as the creation process of money, the tools used by the Federal Reserve to control the money supply, and the combinations of monetary policy required to balance growth, low inflation and a reasonable rate of unemployment.
Foremost, money is created through the actions of the central bank, the government and the private banks.The central bank, as the main actor in charge of the overall money supply, is able to determine the overall supply of money in the economy through the use of interest rates (discount rates), reserve requirements and open market operations. Foremost, by varying the interest rate, the central bank is able to control the amount of money in circulation in the economy (by encouraging lenders to save more or consumers and businesses to loan more), thereby changing the amount of money in the economy. (Wray, 1998) The interest rate (also known as discount rate) causes the money supply to change by varying the effective ‘price’ of money, and if the interest rate is higher, banks are unable to lend as much money as before, causing the money supply to contract. Conversely, if the interest rate is lower, banks will be able to lend more money, which causes the money supply to expand. Secondly, the central bank can change the amount of reserve requirements required by private banks. Banks typically do not hold the bulk of their loans or capital in hard cash or assets, as they typically accept money or capital from one party, keep a reserve fraction of it (such as 10 to 20%), and then loan out the rest to generate income through interest rates. (Clarida, 2000) As a result, central banks have to levy reserve requirements (the minimum proportion XX XXXXX that have to XX held XX XXX bank as XXXXXX assets XXXX XX cash) in order to XXXX them XXXXXX. (XXXXXXX, XXXX) XX XXXXXXX the reserve requirements, XXX central XXXX forces XXXXXXX XXXXX XX XXXXX the amount XX reserves, which XXXXXX XXXXX ability XX issue loans, XXXXX XXXXXXXXX XXXXXXXXXX the money supply. XX XXXXXXXXXX the reserve requirements, XXX central XXXX XXXXXX XXXXXXX XXXXX XX XXXX XXXX XXXXXXXX in XXXXX, which allows XXXX to issue XXXX XXXXX, thereby increasing XXX XXXXX XXXXXX.
XXXXXXX, open XXXXXX XXXXXXXXXX allow a central XXXX XX purchase XXX sell US backed XXXXXXXX XXXXXXXXXX in XXX XXXX market. By buying XXXX XXXXXXXXXX, XXX XXXXXXXX XXXX by XXXXX increases, which enables XXXX XX XXXXX XXXX loans at XXXXX interest rates, XXXXX increases the XXXXX supply. XXXXXXXXXX, XX the central bank XXXXX X.S. backed XXXXXXXX XXXXXXXXXX in XXXXXXX volume, XXXX XXX banks’ XXXXXXXX decrease, which XXXXXX them to issue XXXXX XX higher XXXXXXXX rates, XXXXX therefore XXXXXXXXX XXX XXXXX XXXXXX. (XXXXXXX, 2000)
XXXXX other XXXXXXXXXX XXX important in XXXXXXX the modern XXXXXXX of XXXXX creation in XXX XXXXXX economy. XXX printing XXXXX is XXX such XXXXXXXXX. Central banks XXXXXXXXX have XXXXXXX XXXX XXXXX XXXXXXXX presses, XXX can decide how much XXXXX is physically in XXXXXXXXXXX in XXX XXXXXXX. XXXXXXX, XXXX XXXXXXXXX XXX a XXXXX XXXXXX XX XXX XXXXXXX money XXXXXX in the economy, XX the global supply of XXXXX held in XXXXXXXXX XXX XXXXX is estimated to be XX X XX X % XX XXX XXXXXXX money supply. The other mechanism XX XXXX XX private XXXXX’ use of fractional reserve XXXXXXX, which, as previously explained, XXXXXX them XX XXXX only a XXXXXXXX of XXXXX total XXXXX in the XXXX XX XXXX XXXXXXXX, and loan out XXX rest to consumers, homeowners, XXXXXXXXXX and XXXXX XXXX XXXXXX. As a result, XXXXX XXXX XXX XXXXX issue a XXXX with XXXXX XXXX XX not have, they implicitly XXXXXX money XXX XXXXXXXX XXX money supply. This is also XXXXX XX the fractional reserve theory XX money creation. (Woolley, 1985) The XXXXX mechanism XXXX is XXXXXXXXX XX XXX XXXXXXXXX XX XXXXXXXXXX spending, XXX U.S. government, by the act XX spending, XXXXXXX XXX U.S. treasury to issue XXXXXXXXXX (in XXX XXXX of bonds or XXXXX to the X.S. government) XXXXX XXX then bought or XXXX by the XXXXXXX Reserve. XXXXX, the XXXXXX XX U.S. XXXXXXXXXX XXXXXXXX will impact XXX XXXXX amount of XXXXX XXXXXX XXXXXXX the amount of U.S. XXXXXX treasury securities in XXXXXXXXXXX.
XXX XXXXXXX XXXXXXX XXXXX measures and XXXXXX XXX money supply XXXXXXX the use of XXX X-XXXXXX, which comprises M0, M1, XX XXX XX. M0 XXX XX, XXXXX XX ‘XXXXXX XXXXX’, XXXXXXXX coins and notes in active XXXXXXXXXXX XXX other highly XXXXXX XXXXX of XXXXX. M2 comprises M1 and short-XXXX time deposits. M3 XXXXXXXXX XX and long-XXXX deposits. XXXXX XXXXXXXXX XXXXX XX XXXXX supply help XXX XXXXXXX XXXXXXX XX measure and track the volatility XXX progress of its XXXXX.
As earlier discussed, the tools XXXX XX the Federal XXXXXXX to control XXX XXXXX supply are XXXX market operations (the XXXXXXXX and sale XX US backed XXXXXXXX securities in XXX XXXX XXXXXX), reserve requirements (the amount of XXXXXXXX banks have to hold XX a fraction of their XXXXX assets), XXX interest XXXXX (XXX ‘price’ of money in an XXXXXXX). In reality, XXX Federal Reserve XXXXXX uses open XXXXXX operations, XX their impact XX immediate, precise XXX XXX XX XXXX in a XXXXXX of XXXXX. XX XXXXX struggle XX XXXXXX loans XX reserves, banks typically XXX to set their XXXXXXX XXXXXXXXXXXX to the level XXXX XXXXXXXXXX the XXXXXXX XXXX XXXX XXX. XXXX XXX XX XXXXXXXXXXXX typically XXXXXXX XXX use of reserve XXXXXXXXXXXX XX influence XXXXX XXXXXX XXXXXXXXXXX, because private XXXXX would already have anticipated it beforehand. (XXXXXXX, XXXX) XXXXXXXXXXX, the XXXXXXXX rate is XXX XXXX effective in XXXXXXXXXXX XXX money XXXXXX as it has to XXXXXX that private banks are XXXXXXXXX XXXXXXXX from XXX Federal Reserve, when in XXXXXXX, the link between XXXXXXX XXXX XXXXX from XXX XXX XXX XXX discount XXXX is XXXXXXX XX XXXX.
Monetary policy XXXXXXXX the XXXXXXXXX or contraction of the XXXXX supply, XXX XXX XXXXXXXX or XXXXXXXX XX XXXXXXXX rates. As a result, it XXX a XXXXXXXXXXX impact XX XXXXXXXXXXXXX indicators such XX XXXXXXXXXXXX, XXXXXX XXX inflation. X XXXXXXXXXXXXXX monetary XXXXXX, where the central bank acts to restrict XXX XXXXX XXXXXX and XXXXX interest XXXXX, typically leads XX a XXXX in growth rates, a XXXX in unemployment XXXXX, and a fall in inflation rates. XXXX XX XXXXXXX contractionary XXXXXXXX policy typically XXXXXXXXX XXX amount of loans XXX XXXXXXXXX in an XXXXXXX, which allows consumers to consume XXXX (ie. by XXXXXX out XXXXX XXX XXXX, home XXXXXXXXX, XXX.) XXX businesses to XXXXXX less. XXXXXXXXXX, an expansionary XXXXXXXX policy, XXXXX the XXXXXXX XXXX acts to increase XXX money supply and lower XXXXXXXX rates, typically leads to a rise in XXXXXX rates, a fall in XXXXXXXXXXXX XXXXX, XXX a XXXX in inflation XXXXX. XXXX XX because XXXXXX XXX XXXXXXXX supply XXXXXX consumers XXX businesses XX spend and invest XXXX (XXXX credit XXXX XXXXXX XXXXXXXXX), XXXXX spurs growth and XXXXXXXXXX but is also XXXXXXXXXXXX in nature. (XXXXXXX, 1985)
The XXXXXXXXXXXX of XXXXXXXX XXXXXX XXXXXXXX XX balance growth, low inflation XXX a reasonable XXXX of unemployment XXX complex, and are XXXXX XXXX imperfectly XX the XXXXXXXXXXXX XX the XXXXXXX XXXXXXX. The XXXXXXX Reserve XXXXXXXXX XXXXXXX a XXXXXXXXXX rate XX unemployment XX X% (which only reflects the natural rate of unemployment in XXX XXXXX economy), an XXXXXXXXX rate XX X XX X%, and a growth XXXX of 3 to X% in a XXXXXX XXXXXXX. XXXXX, if the XXXXXXX is growing too XXXX and XX inflationary, contractionary monetary policy has to XX implemented in order to expand the XXXXX supply, XXXXX interest XXXXX, XXX boost the XXXXXXXXXXX XX XXXXXXXXXX XXX consumers. (Wray, 1998) XXXXXXXXXX, if the XXXXXXX XX XXXXXXX XXX XXXXXX XXX XX XXXXXXXXXXX, XXXXXXXXXXXX monetary policy has XX XX implemented in order to XXXXXXXX XXX money supply, XXXXX interest rates, XXX lower XXX XXXXXXXXXXX of XXXXXXXXXX and consumers. However, XXX ability XX XXX central XXXX to act XXXXXXXXXXX of XXXXXXXXX interests has XXXX XXXXXXXXXXXX XXXXXXXXXX, given XXXX it XX difficult to XXXXXX a mandate to restrict XXXXXX in a time XX a XXXXXXX XXXXXXX. (Wray, 1998)
In XXXXXXXXXX, XXXXX XX XXXXXXX XXXXXXX XXX Federal XXXXXXX’s XXX of XXXX market XXXXXXXXXX, reserve XXXXXXXXXXXX and XXXXXXXX rates, XX well XX XXXXXXX government XXXXXXXX XXX the XXX XX the printing XXXXX. XXXXXXXXXX XXXXX XXXXXXXXXX XX this process XX XXXXX XXXXXXXXXX reserve XXXXXXX XX XXXXX loans and create XXXXX XXXXXXXXXX, while XXXXXXXXXXX XXXXXXXXXX by XXXXXXX XXXXX XXXXXXXX. The XXXXXXX Reserve’s XXXXXXXXX XXXX XX XXXXXX XX vary XXX money supply is XXX open XXXXXX XXXXXXXXXX XXXXXXX, XXX the Federal XXXXXXX has to pursue XXXXXX XXXXXXXXXXXXXX or XXXXXXXXXXXX XXXXXXXX policy, XXXXXXXXX XX the state XX XXX XXXXXXX, in order to XXXXXXXX XXX appropriate level XX inflation, growth and unemployment in the economy.
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Clarida, X., Gali, J., & XXXXXXX, M. (2000). Monetary policy XXXXX and macroeconomic XXXXXXXXX: XXXXXXXX and XXXX XXXXXX.XXX XXXXXXXXX XXXXXXX XX XXXXXXXXX,115(1), XXX-180.
Friedman, M. (1995). XXX XXXX of XXXXXXXX policy. InXXXXXXXXX XXXXXXXX in XXXXXXXXX(pp. 215-231). Palgrave, XXXXXX.
Hetzel, R. X. (XXXX).The XXXXXXXX policy of XXX Federal XXXXXXX: a XXXXXXX. Cambridge XXXXXXXXXX Press.
XXXXXXX, X. X. (XXXX).Monetary politics: The Federal XXXXXXX and XXX XXXXXXXX of XXXXXXXX XXXXXX. XXXXXXXXX University Press.
Wray, X. R. (1998). Understanding modern money.Books.
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