2015 Spring Economics Assignment
Question 1: Effects of Cash Reserve Ratio Reduction on Inflation, Money Supply, Employment Rates and Gross Domestic Product
Regulators of financial matters and performance in a given country or region are often faced with the difficult task of ensuring that the performance of the economy is always positive. This is because the economy of a country directly influences the standard of living in the country through factors such as employment and the overall prices of commodities in the country. to effectively control, the performance of the economy, regulators make use of various tools that are at their disposal.
Controlling the financial instruments in the country presents regulators with the best of options in determining the economic performance. During difficult times when a region might be experiencing various challenges financially, the government through regulatory bodies can opt to employ the various ways of controlling the financial instruments in the country. Controlling the levels of cash reserve ratio presents regulatory bodies with a viable option depending on the end desires of the government. The term cash reserve ratio is used in describing the amounts that regulatory bodies stipulate for lending outlets to keep as a reserve and deposit. Essentially, money or funds that are kept as reserve by the lending outlets such as banks are not supposed to be used in the provision of short term or long term credit to the other players in
The Fractions Reserve System is a system where only some of the banks actually have cash on hand. Because of this the money supply is able to grow beyond what it used to
Also known as Cash Reserve Ratio, it is the percentage of deposits which commercial banks are required to keep as cash according to the directions of the central bank. (Times) . When a bank is left with excess reserves they can do a federal refund and lend money to other banks that might be running low on reserves. The reserve ratio is applied when the bank is low on the amount of reserves it has, at this time the bank is than forced to reduce checkable deposits while reducing its money supply. In some cases is also may need to increase its reserves. The bank can increase its reserves by selling bonds, which would also lower the money supply in the
15. If for a country, the quantity of its currency demanded exceeds the quantity supplied, then there is a
The Federal Reserve was established as the Central bank of the United States in late 1913. Commonly referred to as “the Fed,” it is responsible for managing currency, money supply, and interest rates (Lecture, 10/6). While the bank is given much autonomy over its actions, it is not independent from the US government in that the legislature is responsible for allowing the Federal Reserve to act freely, and elected officials appoint central bankers. These are two primary mechanisms for keeping the Fed in check, insuring that it is acting in the nation’s best interest (O, 286). Countries with central banks that are independent from their governments tend
This report discusses the association between the Federal Reserve System and U.S. Monetary Policy. It mentions that the government can finance war through money printing, debt, and raising taxes. It affirms that The Federal Reserve is not a government entity but an independent one. It supports that the Federal Reserve’s policies are the root cause of boom and bust cycles. It confirms that the FED’s money printing causes inflation and loss of wealth for United States citizens. It affirms that the government’s involvement in education through student loans has raised the cost of a college education. It confirms that the United States economy is in a housing bubble, the stock market bubble, bond market bubble, student loan bubble, dollar bubble, and consumer loan bubble. It supports the idea that the Federal Reserve does not raise interest rates because of the fear of deflating the bubbles they have created in recent years.
The Federal Reserve System was created by Congress in 1913 and passed the Federal Reserve Act in order to provide for a safer and more flexible banking and monetary system. According to the changing needs of the system, its objectives have been changing throughout the history of the Fed. At first, “its original purposes were to give the country an elastic currency, provide facilities for discounting commercial credits, and improve the supervision of the banking system under a decentralized bank.” (The Federal Reserve System, 1984, 1). Prior to its establishment (the Fed), the supply of bank credit and money was inelastic, thus resulting in an irregular flow of credit and money, and contributed to unstable economic development. These objectives were aspects economic policies and national monetary. However, through time, stability and growth of the economy, high employment levels, stability in the purchasing power of the dollar, and reasonable balance in transactions with foreign currencies have become to be recognized as primary objectives of the governmental economic policy.
The Federal Reserve, Bureau of Labor Statistics, Department of Labor, Department of Commerce and Treasury Department play crucial roles in the value and availability of money in the USA economy. First, the Federal Reserve is the central bank of the United States. It is run by a Board of Governors appointed by the president and serves as a bank to banks. It performs five general functions to promote the effective operation of the U.S. economy. One, it conducts the nation's monetary policy to promote maximum employment, stable prices, and moderate long-term interest rates in the U.S. economy. Second, it promotes the stability of the financial system and seeks to minimize and contain systemic risks through active monitoring and engagement in the
The first to be discussed is the discount rate is the interest rate charged by the Federal Reserve to banks for short term loan basis. The increase and decrease of the money supply is determined by the discount rate. Discount rate would be used is a bank needed twenty million dollars, the money would be borrowed from the United States treasury but has to be paid back at a interest rate of three percent. This monetary tool would be used with inflation if the expected inflation increases so will the discount rate and vice versus at the same rate remaining equivalent. During periods of time with high unemployment rate the discount rate is lowered in order to counteract high unemployment and to prevent the possibility of a recession. Secondly, there is the ratio reserve. Ratio reserve is the amount of money that has to be kept at a bank on reserve; this amount can be adjusted to back outstanding deposits. Ration reserve creates the marginal money supply at any given moment due to the Fed raising or lowering the reserve requirements. Although it is rarely used to control the money supply it is a tool that can be used. An example of how it would be used would be if Will comes in and deposit one thousand dollars and the reserve amount is ten percent, of that one thousand dollars one hundred will go to the reserve ratio. Allowing the other ninety percent to be used as a money supply for loans and etc. In the case of unemployment and high inflation the Fed has to lower the reserve ratio in order to decrease the unemployment rate and inflation because if the reserve ratio is lower then the economy and the money supply is moving more vividly. Lastly is the open market operations. Open market operations is the act of buying and selling Treasury securities’ between the Fed and certain selected banks in the open market, it is directed by the FOMC. Open market operations would be considered
Morrison suggests that government should try to make regulations that can make TBTF policy effective rather than, try to end the policy, which is impossible. Morrison discusses the role of the policy in designing suitable capital regulations, in the restriction of bank scope and in institutional design. The author argues that financial institutions receive help from taxpayers and government because regulatory authorities believe that its failure would have severe effects on the country’s economy.
In order for the Federal Reserve to fulfill their goal of moderate long term interest rates, stable prices and maximum employment, they rely on developing strategic changes to the monetary policy. Through monetary policy changes, the Federal Reserve can either restrict or encourage economic growth and inflation, thereby molding the macroeconomy into a state of consistent health. Overall, there are three tools used to modify the monetary policy, they include reserve requirements, discount rates, and open market operations. In an effort to promote price stability within the economy, these tools influence monetary conditions by affecting interest rates, credit availability, money supply and security prices. While one tool is use more frequently than the others, all three are necessary in establishing stable economic conditions.
One form of direct control can be exercised by adjusting the legal reserve ratio (the proportion of its deposits that a member bank must hold in its reserve account), and as a result, increasing or decreasing the amount of new loans that the commercial banks can make. Because loans give rise to new deposits, the possible money supply is, in this way, expanded or reduced. This policy tool has not been used too much in recent years. The money supply may also be influenced through manipulation of the discount rate, which is the rate if interest charged by the Federal Reserve banks on short-term secured loans to member banks. Since these loans are typically sought to maintain reserves at their required level, an increase in the cost of such loans has an effect similar to that of increasing the reserve requirement. The classic method of indirect control is through open-market operations, first widely used in the 1920s and now used daily to make some adjustment to the market. Federal Reserve bank sales or purchases of securities on the open market tend to reduce or increase the size of commercial bank reserves. When the Federal Reserve sells securities, the purchasers pay for them with checks drawn on their deposits, thereby reducing the reserves of the banks on which the checks are drawn. The three instruments of control explained above have been conceded to be more effective in preventing inflation in times of high economic activity than in bringing about revival from a
Monetary policy uses changes in the quantity of money to alter interest rates, which in turn affect the level of overall spending . “The object of monetary policy is to influence the nation’s economic performance, as measured by inflation”, the employment rate and the gross domestic product, an aggregate measure of economic output. Monetary policy is controlled by
The goal of financial regulation is to increase efficiency in the market, as well as enhance the market 's ability to absorb shock caused by financial instability. There are many reasons for financial instability, but it can be narrowed down to
List of abbreviations List of tables Acknowledgements Abstract 1. 2. 3. 4. 5. 6. 7. 8. Introduction Problem statement Objectives and hypothesis of the study Literature review Structure and performance of the financial sector in
At the same time, the regulators should be as transparent as possible and fully accountable. The accountability and transparency of the regulator will increase the credibility of the regulator and in-turn benefit the regulated entity. Types of Financial Regulation Financial regulation in a country can be done either by a single body called a single regulator or multiple bodies co-existing and working together or in a hierarchy of entities known as multiple regulators. A regulator whether single or multiple does not determine the economic standing of a country or its financial strength. Many developed countries of the world follow either the system of single regulation or multiple regulations. Often in times of economic crisis or financial boom in the country’s economy the government of the nation will review its regulatory system and choose to expand or close down some of its regulatory bodies.