Money Created By The Federal Reserve Bank: How Is Money Created?

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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. This equals no effect on the money supply. If the Fed wants to restrict the money supply, they may raise the discount rate so that banks and lenders are discouraged from borrowing from the Federal Reserve Bank (McConnell & Brue, 2004). The Fed mandates the required reserve ratio (RRR) for banks and other financial institutions. This ratio determines the dollar amount a financial institution…show more content…
All monetary policy factors work together in collaboration to achieve a balance between economic growth, low inflation, and a reasonable rate of unemployment. It is important to have a good balance between the different factors influencing monetary policy because if the money supply is either too “easy” or too “tight” there are undesirable effects on the economy. If the money supply is increased to eliminate or reduce inflation, and it is not done carefully, and gradually—the economy could suffer from increased unemployment and a recession may result. If the money supply is decreased to help the economy overcome a recession, and it is not done carefully and with gradually, it can result in economic inflation. Neither one of these are desired effects, so caution and careful consideration of possible monetary policy actions is necessary each time a decision is
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