--%>

Utilization of Bond market to make and destroy money

How does the FED utilize the bond market to make and destroy money? Which technique do developed countries utilize to decrease the chance of experiencing inflation? What about the Banana Republicans and inflation, do they have this means acessible to them?

E

Expert

Verified

The bond market is a frequently used tool for creating or destroying money. When the Fed wants to create money, it purchases the government securities from dealers, so that the dealers’ bank accounts will be credited. The dealers are most probably the banks and when banks have more deposits, they have more to lend to the economy and thus money is created by purchase of bonds by the Fed. Similarly, when the Fed wants to destroy money, it sells government securities to dealers, so that the dealers’ bank accounts will be debited. When banks have fewer deposits, they have less to lend to the economy and thus money is destroyed by sale of bonds by the Fed.

Inflation occurs when the money supply has largely exceeded demand. In order to reduce the chance of experiencing inflation, money supply needs to be lowered or money has to be destroyed and hence the Fed will sell more of government bonds. In this case, the prices eventually drops and interest rates increase thus reducing the chance of experiencing inflation. Banana Republics refer to nations which propose public policies entirely to benefit private corporations for exploiting the public lands and the debts, if any, incurred will be public responsibility. Thus such republics have unstable politicians and hence they do not care for inflation or any such issues. Since Banana Republicans do not concern about public property or the public in general, they certainly do not have any inflationary control measures.

   Related Questions in Macroeconomics

  • Q : Macroec Examples of command economies

    Examples of command economies are: a) the United States and Japan b) Sweden and Norway c) Mexico and Brazil d) Cuba and North Korea

  • Q : List Which of the following lists

    Which of the following lists includes only capital resources (and ther Which of the following lists includes only capital resources (and therefore no labor or land resources)?

  • Q : Fiscal deficits What are the causes of

    What are the causes of the fiscal deficits experienced by many developed nations in the past three years and what are the main effects of the resulting government borrowing? For example – Greece/Ireland/Portugal/Spain situation and the large def

  • Q : Value added technique for national

    What is the alternative name of value added technique of estimating national income? The alternative name of value added technique of estimating national income is production method.

  • Q : Define Administrative revenue

    Administrative revenue: Administrative revenueis the revenue which occurs on account of the administrative function of government. It comprise: (a) Fees (college/school) (b) License fees paid to obtain permission to carry out a service (c) Fines and p

  • Q : Tax when consumer pay high price When a

    When a tax on goat cheese is completely paid by consumers via higher prices, then the tax has been: (i) alleviated. (ii) Forward shifted. (iii) Backward shifted. (iv) Actualized. (v) Randomized. Can someone help me in getting throu

  • Q : Functions of central bank Describe

    Describe functions of central bank? Answer: (A) Issue of currency: Central bank is the only authority for the issue of currency

  • Q : What are the strength and weakness What

    What are the strength and weakness of using per capital national income? give explained answer for query

  • Q : Supply of foreign currencies into

    What are the main sources of supply of foreign currencies into domestic economy? Answer: A) Foreigners purchasing home country’s goods and services via exports. B) Foreign investment in home country via

  • Q : About macroeconomics Do you think that

    Do you think that macroeconomic policy should be designed to achieve a measured unemployment rate of zero? Why or why not should this be the case?