How does the money supply affect an economy when applying policies made by the Federal Reserve?
1 Answer
money supply and the federal reserve
Explanation:
the reason of money supply or the control of money is that the Federal Reserve can control the money in circulation within an economy, the Federal Reserve controls the supply of money because it is the only organization allowed to make, destroy and replace money.
if the Feds decide to decrease the amount of money in circulation, the intent is that they want to decrease the amount of goods and services being bought and sold within that economy; if there is no money, there is no product and there is no exchange, therefore no growth.
the policy applied to the money supply is always an objective towards a bigger reason, either contractional or expansionary.
Contractional means that the intent is to decrease, this can be used to combat demand pull inflation, they take away all the excess money chasing too few goods and services, this will result in a decrease in the prices of those goods and services because there will be a market equilibrium at a much lower price than before.
expansionary means that the Feds look to increase the economic activity by supplying more money than in circulation within an economy, this is usually accompanied by reduced repo rates, which is the price of borrowing to the commercial banks.
so the supply of money affects the economy in various ways but it all depends on the intention of the supply, is it to contract or expand?
