The federal government attempted to fix the economic problems through costly economic stimulus packages, which only resulted in further national debt. So one would have to ask if the fiscal policy the government is currently using is working. Many economist say America is suffering from debt deflation. Americans are trying to pay down debt by spending less, but this is causing their debt problems to worsen. Economists believe that government spending should rise temporarily so the drop in private spending can repair itself.
As situations happen around the world the internal economy is being affected, the price of oil increases and more money in the market should be created, but this will affect the inflation, as more money is in the market, the GDP keep growing and the unemployment is decreasing. To balance the economic growth, lower the inflation, and make a reasonable rate of unemployment it is important to take in consideration that typically if money is released into the system the real Gross Domestic Product will increase, creating opportunities of work and decreasing the unemployment rate. After indentifying the tools used for the Federal Reserve and analyzing the influence this has with the money supply the Feds can add or take money into the system to control the levels of inflation, increase the Gross Domestic Product and reduce the
Since, the FED set the interest rate in which the banks borrow from, Edgars’ ability to borrow enough money or establish a line of credit to start his business will be affected by inflation, interest rate and financial policies. However, in some situations, an unanticipated inflation can benefit Edgar, as this type of situation whenever inflation rates are underestimated for the life of a loan, the bank loses and Edgar will
My rationale for the Reserve Requirements would be by lowering the reserve requirements, and the banks will be able to have more money to loan, and then increasing the money supply. Scenario 2 In 150 to 200 words, explain your reasoning for the way you are planning on using the Discount Rate. Be sure to address the following:1. How the Discount Rate can affect the economy2. How your action will affect economic growth3.
Monetary policies influence the productivity of the country and this is how employment is affected. If there is a decrease in interest rates then more people are going to borrow money because the cost is lower. “Lower interest rates also change the willingness of financial institutions to lend money” (Federal Reserve Bank of San Francisco, 2011). With the financial institutions more willing to loan money, more people will borrow money and then there will be a higher demand for goods and services. As the demand for goods and services increase the demand for labor follows
If the money supple is low the Federal Reserve can lower the discount rate or interest rate and this will increase the money supply. This will allow the banks to lower the interest rates also allowing more consumers and businesses to borrow money. If the money supply is high then the Federal Reserve can raise the discount rates and this will lower the money supply. This will cause interest rates to go higher in banks causing fewer loans to be made to consumers and businesses. The Federal Reserve sets the discount rate with the approval of the Board of Governors.
In the case of our government, debt is managed primarily by selling bonds. The process is cyclical as the government has to sell new bonds to pay for older bonds that have matured. It is important to realize that debt should be judged in relation to assets. While debt is probably never a good thing, in the case of the U.S. economy it is not as bad as it seems. When we view some of the assets of the United States such as natural resources, skilled workforce, and tax revenue generating businesses, we see that our assets have enough value to sustain our current debt level
How is money created? Money is created by the Federal Reserve Bank (a U.S. “central” bank) at certain times or taken out of the economy at certain times to create a favorable balance that enables economic growth, low inflation, and a reasonable rate of unemployment. The monetary policy is deliberately changed to “influence interest rates and the total level of spending in the economy” (McConnell & Brue, 2004). Spread between the DR (discount rate) and FFR (federal funds rate). If the spread is positive, the banks will “always” borrows from other banks.
Money has four major functions and medium of exchange is what the nation uses the most in current economy. Medium of exchange is where seller accepts money in exchange of goods and services. The central bank manages nation’s monetary system by selling government bonds in the open-market to maintain control of supply and demand of money. Economic recovery is the stated direction of the recent monetary policy in the United States. Interest rates can effect economy’s production and