--%>

Methods that FED can use to make money

What are the four methods that FED can use to make money? What are the most powerful one and what technique the FED to create a gradual easing of the money supply either created or destroyed most seldom uses?

E

Expert

Verified

The four ways in which FED can create money are

Open Market Operations purchase: This refers to the Federal Bank purchasing government securities in the open market, so that they can increase the reserves of the banks, which can in turn use these reserves to make loans, thus creating new money in the economy,

Decrease in Required Reserve ratio: It is mandatory for all banks to keep a certain amount of deposits with the Federal Bank as a measure of safety. On reduction of these requirements, banks can keep less with Fed and lend more, thus creating money in the economy,

Decrease in interest/discount rates: When interest rates are lowered, it leads to money being cheaply available, which will hence push banks to lend more or people to obtain more loans, thus improving money supply in the economy and

Quantitative easing: This is the creating of a considerable amount of money by the Fed through its purchase of assets such as long-term government bonds, company bonds, stocks, asset backed securities, etc that it normally does not buy. This improves bank reserves, which are used to lend loans, thus creating money in the economy.

In reality, changing the reserve ratio is a heavy-handed approach and hence it is an infrequently used approach. Quantitative easing is also employed only when lowering the discount rate is not effective any more as the interest rates have already been reduced to or very near to zero percent. The Fed normally uses lowering the discount rate to gradual ease the money supply, after which it utilizes the open market operations approach. Thus the Fed most often uses the discount rate change approach. Only if this approach does not function as expected, the other methods are employed.

   Related Questions in Macroeconomics

  • Q : Equal Marginal advantage law Assume

    Assume that you receive $18 worth of “jollies” (that is, satisfaction, utility or pleasure) from the very first hole of golf played on a particular day, and that your extra jollies from succeeding holes drops $1 for each and every hole played. You should p

  • Q : Illustration of arbitrage The

    The illustration of arbitrage takes place when: (1) Enterprising students purchase used textbooks much cheaply on E-Bay and sell them to another students at lower prices than bookstore charges. (2) Ivan purchases a stock when it is cheap and sells it

  • Q : Fiscal and Monetary policies How can

    How can governments seek to control their national economies through fiscal and monetary policies?

  • Q : Why Exceptional Demand Curve Explain

    Explain with examples the reasons for exceptional demand curve

  • Q : Define Macro Economics Macro Economics

    Macro Economics: Macro economics studies the economy as an entire.

  • Q : Fiscal Monetary changes With the

    With the general equilibrium framework in place, the stage is now set for introducing fiscal and monetary changes and analysing their effects on the general equilibrium. We will first introduce a fiscal change in the form of increase in deficit-financed expenditure, a

  • Q : Plan and non-plan expenditure Write a

    Write a brief note on plan and non-plan expenditure of the government with illustration. Answer: Plan Expenditure

  • Q : Diminishing prices raising total revenue

    Diminishing prices will raise total revenue from DVD game sales at each and every price: (1) On this demand curve. (2) Beneath $25. (3) Above $25. (4) Beneath $30.

    Q : If the MPC is .70 and investment

    If the MPC is .70 and investment increases by $3 billion, the equilibrium GDP will:

  • Q : Define fiscal policy Define fiscal

    Define fiscal policy? Answer: Fiscal policy is the revenue and expenditure policy of government with a view to combat the state of inflationary or deflationary gap