ipl-logo

Recessionary Gap Analysis

844 Words4 Pages

Under the recessionary gap, an easy monetary policy should be exercised. In this situation, the Federal Reserve can increase the money supply by lowering the required reserve requirements, buying government securities in the open market operations, and by lowering the discount rate. To increase the money supply, the Federal Reserve has to lower interest rates through the money market. This would cause an encouragement to businesses to do more investment spending, which would shift the aggregate demand curve outwards. In other words, the Fed can increase the money supply by lowering interest rates and stimulating investment spending.

2) Explain the" MONEY MULTIPLIER" of money creation including the formula and the process.(2 points)

The money …show more content…

(2 points)

A bond is defined by its face value, coupon rate, maturity rate, and tax treatment. Bond prices and interest rates have an inverse relationship. This means that when one goes up, the other one goes down. In other words, when the interest rate goes up, then the present value is going to fall. For example, if I pay a high price to purchase a bond, then a smaller percentage of what I get back counts as interest. Since I am paying more to get this bond, then less of it counts as interest. If I pay less than the face value for a bond, then the rate of return on that bond will be greater than the coupon rate.

5) If RRR (Required Reserve Ratio) is larger, is the Money Multiplier bigger or smaller? Why? Explain its process and based on formula. (2 …show more content…

The required reserve ratio is a fraction of reserves set by the Fed that banks are required to hold. This means that if we lower the required reserve ratio, the amount that banks can lend to their customers and the money supply increase. Raising the required reserve ratio causes the money supply and the amount that banks can lend to their customers to decrease. The formula 1/Required Reserve Ratio allows us to prove the information above. If we have a 10% require reserve ratio and we add it to the formula (1/0.10), then we end up with a money multiplier of 10. Ten percent of all the new total reserves are required to be reserved by the bank. If the required reserve ratio is increased to a larger percentage of 50% and is added to the formula (1/0.50), then we end up with a money multiplier of 2. Why does this happen? Well, if the bank is required to withhold 10%, then the amount they can lend is higher. However, when the bank has to hold 50%, then the amount they can lend is lowered because they are withholding fifty percent of all the new total

Show More
Related

  • The Federal Reserve Act Of 1913: A Case Study

    538 Words  | 3 Pages

    The Federal Reserve Act of 1913 gave the Federal Reserve the responsibility for setting monetary policies. The term refers to action taken by a central bank to influence the availability and cost of money and credit to help promote national economic goals, according the Federal Reserve website. This Act also helped to create a unified national money system and permitted mortgage loans. Mortgage loans were new at this time. Now, what is the Federal Open-Market Committee (FOMC)?

    Read More

  • What Is The Main Point Of Jennings Bryan's Cross Of Gold Speech

    1598 Words  | 7 Pages

    This money supply question created two distinct sides

    Read More

  • Why Was The Federal Reserve Formed?

    1005 Words  | 5 Pages

    History Of The Federal Reserve Why was it formed? The federal reserve was formed due to financial crises which caused massive problems not just for the bank that was falling but for all banks. One bank falling would cause a huge panic in which people rushed to their banks to pull out their deposits. The panic caused by one bank falling caused a domino effect on other banks.

    Read More

  • Pros And Cons Of The Federal Reserve System

    1282 Words  | 6 Pages

    The Federal Reserve is the centralized banking system of the United States. It was designed to provide the US with a safer, more flexible, and more stable monetary and financial system (federalreserve.gov). The Federal Reserve uses various tools such as open market operations, reserve requirement, discount window lending, or quantitative easing when it comes to conducting the monetary policy. Even though some may argue on weather why they believe the Federal Reserve System is or is not beneficial to our economy, the Federal Reserve Act is still one of the most talked about laws concerning the US financial system today.

    Read More

  • Reasoning Behind The Creation Of The Federal Reserve System

    1083 Words  | 5 Pages

    December 24, 1913, the United States Congress along with the help of President Woodrow Wilson created the Federal Reserve Act. The Federal Reserve System was established as an independent government agency. The reasoning behind creation of the Federal Reserve, was to establish a disciplined banking system, which would help avoid economic collapses, commonly known as a crash. Another reason the Federal Reserve System was created, was to protect the government system from political pressuring, so they could maintain an appropriate supply of money going into the economy. Prior to the creation of the Federal Reserve System, there was a fear that the central banks would gain too much power, which served as another reasoning behind the creation of

    Read More

  • Federal Reserve Outline

    836 Words  | 4 Pages

    The FOMC states that the inflation at the rate of 2 percent is most consistent over the longer run with the Federal Reserve’s statutory mandate. b. The Federal Reserve tried to reestablish stable prices to help with “The Great Recession.” However, in an attempt to lower inflation, it raised short term rates to the point that not only does inflation slow but the economy lapses into a recession. c. “We find that these policies are indeed effective in easing broad financial conditions – not just lowering government bond yields – when policy rates are stuck at the zero lower bound,” wrote John Rogers, Chiara Scotti and Jonathan Wright in a new working

    Read More

  • Federal Reserve Essay

    729 Words  | 3 Pages

    This is done by lending reserves to banks when the banks need more for their own reserves. Typically, banks borrow from the Federal Reserve and pay an interest rate on the money that they borrowed which is defined as a discount rate. The Fed can use the discount rate to their advantage if they want to increase or decrease the supply of money in the economy. They increase the discount rate when they want banks to borrow less, which would deter the banks from seeking a loan and thus the money supply decreases. If the Fed wants to add more to the money supply, they would lower the discount rate.

    Read More

  • Why Are Founding Fathers Outlaw Slavery

    705 Words  | 3 Pages

    In the next two paragraphs, I will show you the relationship

    Read More

  • Milton Friedman's Neoliberalism Analysis

    1215 Words  | 5 Pages

    Along the same line of thinking for protecting the freedoms of the people, the government creates and enforces the law of the market but should not directly participate in the game (Friedman, 1975). Intervention as a discrepancy from Friedman’s theory is understood as the Federal Reserve keeping interest rates low prior to the crisis. This will be discussed later in the

    Read More

  • How Does The Federal Reserve Affect The Economy

    613 Words  | 3 Pages

    The Federal Reserve is one of the most powerful entities we have in the United States. The decisions that are made by the Federal Reserve will have an impact on every person that is living in the country of the United States and will have an impact on the global market. Two ways that the Federal Reserve may impact a person’s life and the global market are by inflation and monetary policies. Inflation is the sustained increase in the general level of prices for goods and services in a county, and is measured as an annual percentage change. (Investopedia)

    Read More

  • Naked Economics Chapter 1

    638 Words  | 3 Pages

    Tax cuts reduce the recessionary gap. Therefore, in order to eliminate the recessionary gap, there is need for falling tax collections i.e. tax cuts. 9. Classical economists assumed that the market forces through flexible prices, wages, and interest rates would move the economy toward potential GDP (McEachern, 2015). The assumption economists believed that natural market forces such as changes in prices, wages and interest rates could correct the problem of the market, thus the market is self-correcting.

    Read More

  • DBQ Great Recession

    624 Words  | 3 Pages

    The Great Recession was a period of general economic decline observed by world markets beginning around the end of the first decade of the 21st century. The recession was a result of a financial crisis in 2007 which effected the years to come . The primary source of this problem was that banks were creating too much money. In addition, banks had doubled the amount of money and debt in the economy. Resulting in a financial crisis as the government and banks had failed to constrain the financial system’s creation of private credit and money.

    Read More

  • The Pros And Cons Of Classical Economics

    791 Words  | 4 Pages

    Classical economics emphasises the fact free markets lead to an efficient outcome and are self-regulating. In macroeconomics, classical economics assumes the long run aggregate supply curve is inelastic; therefore any deviation from full employment will only be temporary. The Classical model stresses the importance of limiting government intervention and striving to keep markets free of potential barriers to their efficient operation. Keynesians argue that the economy can be below full capacity for a considerable time due to imperfect markets. Keynesians place a greater role for expansionary fiscal policy (government intervention) to overcome recession.

    Read More

  • Disadvantages Of Economic Growth

    1571 Words  | 7 Pages

    Along these lines, unemployment may decrease, as this has different favorable circumstances, for example, lower government using on profits and less social issues. However, this phenomenon includes a number of different expenses. Firstly, if economic growth is unsustainable and is higher than the long run pattern rate, inflations are liable to be seen. An increase in economic growth could prompt an equalization of issued installments. In case the expanded customer expenditure causes further development, there will be an increase in the import sector.

    Read More

  • Roles Of Money In Macroeconomics Essay

    1772 Words  | 8 Pages

    ROLE OF MONEY IN MACROECONOMICS 1. Introduction Money can be seen as the medium of exchange which is acceptable while transaction is being undertaken between two parties. Some of the common forms of money are: - Commodity money: This is when the value of the good represents its value in terms of money like gold or silver. - Fiat money: This is when the value of the good is less than the value it represents - Bank money: It is the accounting credits that can be used by the depositor Money serves a variety of crucial functions in the economy and this is why it has gained an unparalleled influence in the matters of economy at micro as well as macro levels. Some of the features of money that make it so important for any economy are as follows:

    Read More

More about Recessionary Gap Analysis

Open Document