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<strong>Group Paper #2: Macroeconomic Impact on Business Operations.</strong></span></p> <p><span class="s1"></span> </p> <p><span class="s1">This essay will discuss monetary policy and its impact on macroeconomic factors, as well as the creation process of money, the tools used by the Federal Reserve to control the money supply, and the combinations of monetary policy required to balance growth, low inflation and a reasonable rate of unemployment.</span></p> <p><span class="s1"></span> </p> <p><span class="s1">Foremost, money is created through the actions of the central bank, the government and the private banks.The central bank, as the main actor in charge of the overall money supply, is able to determine the overall supply of money in the economy through the use of interest rates (discount rates), reserve requirements and open market operations. Foremost, by varying the interest rate, the central bank is able to control the amount of money in circulation in the economy (by encouraging lenders to save more or consumers and businesses to loan more), thereby changing the amount of money in the economy. (Wray, 1998) The interest rate (also known as discount rate) causes the money supply to change by varying the effective ‘price’ of money, and if the interest rate is higher, banks are unable to lend as much money as before, causing the money supply to contract. Conversely, if the interest rate is lower, banks will be able to lend more money, which causes the money supply to expand. Secondly, the central bank can change the amount of reserve requirements required by private banks. Banks typically do not hold the bulk of their loans or capital in hard cash or assets, as they typically accept money or capital from one party, keep a reserve fraction of it (such as 10 to 20%), and then loan out the rest to generate income through interest rates. (Clarida, 2000) As a result, central banks have to levy reserve requirements (the minimum XXXXXXXXXX XX XXXXX that have to be XXXX by XXX XXXX XX XXXXXX XXXXXX such XX cash) in order XX keep XXXX XXXXXX. (Clarida, 2000)<span class="Apple-converted-space"> </span>By raising the reserve requirements, the central XXXX forces private banks XX raise the XXXXXX of XXXXXXXX, XXXXX XXXXXX their XXXXXXX to XXXXX loans, which therefore constricts XXX XXXXX XXXXXX. XX XXXXXXXXXX XXX XXXXXXX XXXXXXXXXXXX, the XXXXXXX XXXX allows XXXXXXX banks XX keep less XXXXXXXX in store, which allows them XX issue more loans, XXXXXXX increasing the money supply.</span></p> <p><span class="XX"></span> </p> <p><span class="s1">XXXXXXX, open XXXXXX operations XXXXX a XXXXXXX bank to purchase XXX sell US backed XXXXXXXX XXXXXXXXXX in the open market. By XXXXXX such XXXXXXXXXX, the reserves held by XXXXX XXXXXXXXX, XXXXX enables them to issue more loans at lower XXXXXXXX XXXXX, XXXXX increases XXX money XXXXXX. Conversely, XX XXX XXXXXXX bank sells U.S. XXXXXX XXXXXXXX XXXXXXXXXX in greater XXXXXX, then XXX banks’ reserves decrease, which forces them XX XXXXX XXXXX XX higher interest rates, which XXXXXXXXX decreases the XXXXX XXXXXX. (XXXXXXX, XXXX)</span></p> <p><span class="s1"></span> </p> <p><span class="XX" <three="" XXXXX="" XXXXXXXXXX="" are="" XXXXXXXXX="" in="" XXXXXXX="" the="" XXXXXX="" process="" of="" money="" XXXXXXXX="" economy.="" printing="" press="" is="" one="" such="" mechanism.="" central="" banks="" XXXXXXXXX="" have="" control="" XXXX="" their="" XXXXXXX,="" XXX="" XXX="" decide="" how="" much="" physically="" XXXXXXXXXXX="" however,="" this="" XXXXXXXXX="" XXX="" a="" XXXXX="" impact="" XX="" overall="" supply="" economy,="" as="" XXXXXX="" held="" XXXXXXXXX="" XXXXX="" estimated="" to="" XX="" at="" X="" X="" %="" XXXXXX.="" that="" XXXXXXX="" XXXXX’="" XXX="" fractional="" reserve="" banking,="" which,="" previously="" XXXXXXXXX,="" allows="" them="" XXXX="" XXXX="" XXXXXXXX="" XXXXX="" XXXXX="" form="" hard="" reserves,="" XXXX="" out="" rest="" consumers,="" XXXXXXXXXX,="" XXXXXXXXXX="" XXXXXX.="" XXXXXX,="" XXXXX="" time="" XXXXX="" with="" they="" do="" not="" have,="" XXXXXXXXXX="" create="" increase="" also="" XXXXX="" theory="" creation.="" (XXXXXXX,="" 1985)="" third="" XXXXXXXXXX="" spending,="" u.s.="" government,="" by="" act="" compels="" XXXXXXXX="" XXXXXXXXXX="" (in="" bonds="" or="" XXXXXXXXXX)="" which="" then="" XXXXXX="" sold="" XXXXXXX="" reserve.="" hence,="" amount="" spending="" will="" through="" XXXXXX="" XXXXXXXXXXX.=""></span></p> <p>XXXXX XXXXX XXXXXXXXXX are XXXXXXXXX in explain XXX XXXXXX XXXXXXX of money creation in XXX modern XXXXXXX. The printing XXXXX is XXX such XXXXXXXXX. Central XXXXX XXXXXXXXX have control XXXX their printing XXXXXXX, XXX XXX decide how XXXX XXXXX XX physically in XXXXXXXXXXX in the XXXXXXX. However, this mechanism has a XXXXX impact XX XXX XXXXXXX XXXXX XXXXXX in XXX economy, as the global XXXXXX XX money held in XXXXXXXXX XXX coins XX estimated XX be at 2 XX 3 % XX the XXXXXXX money XXXXXX. The other mechanism is XXXX XX private XXXXX’ use of XXXXXXXXXX XXXXXXX banking, XXXXX, XX previously explained, XXXXXX XXXX XX keep XXXX a XXXXXXXX of their XXXXX loans in XXX form of hard XXXXXXXX, and loan out XXX rest XX XXXXXXXXX, homeowners, XXXXXXXXXX and other XXXX XXXXXX. As a XXXXXX, every XXXX the banks XXXXX a XXXX with XXXXX XXXX do not have, XXXX implicitly create money XXX XXXXXXXX XXX XXXXX XXXXXX. XXXX XX also XXXXX as the XXXXXXXXXX XXXXXXX theory of money creation. (XXXXXXX, XXXX) The third mechanism XXXX is important is the XXXXXXXXX XX XXXXXXXXXX XXXXXXXX, XXX U.S. XXXXXXXXXX, by the act of XXXXXXXX, XXXXXXX XXX X.S. treasury XX issue securities (in XXX XXXX of bonds or loans to XXX X.S. government) XXXXX XXX then XXXXXX or XXXX XX the XXXXXXX Reserve. Hence, the amount of U.S. XXXXXXXXXX spending XXXX impact the XXXXX amount of XXXXX XXXXXX through XXX amount XX U.S. backed treasury securities in circulation.<br></p><p></p> <p><XX></p> <p></p> <p><span class="XX" <XXX="" XXXXXXX="" XXXXXXX="" XXXXX="" measures="" XXX="" tracks="" XXX="" money="" supply="" XXXXXXX="" XXX="" of="" m-system,="" XXXXX="" XXXXXXXXX="" m0,="" m1,="" XX="" XX.="" XX="" XXXXX="" XX="" ‘narrow="" money’,="" comprise="" XXXXX="" notes="" in="" XXXXXX="" XXXXXXXXXXX="" XXXXX="" highly="" XXXXXX="" forms="" money.="" XX="" XXXXX-XXXX="" XXXX="" deposits.="" m3="" XXXX-term="" these="" XXXXXXXXX="" XXXXX="" XXXX="" to="" XXXXXXX="" track="" XXXXXXXXXX="" progress="" its=""></span></p> <p>XXX XXXXXXX Reserve often XXXXXXXX XXX tracks the XXXXX XXXXXX XXXXXXX XXX use XX the M-system, XXXXX comprises XX, XX, M2 and M3. XX and XX, known XX ‘XXXXXX money’, XXXXXXXX coins XXX XXXXX in active XXXXXXXXXXX XXX other highly XXXXXX forms XX money. XX XXXXXXXXX M1 XXX short-XXXX time deposits. M3 XXXXXXXXX M2 XXX XXXX-term deposits. These differing XXXXX XX money supply help XXX Federal Reserve to XXXXXXX and track the XXXXXXXXXX XXX progress XX its XXXXX.</p> <p><br></p> <p></p> <p><span class="XX">As earlier XXXXXXXXX, XXX tools XXXX XX the Federal Reserve XX control the XXXXX supply XXX XXXX market operations (the purchase and XXXX of US XXXXXX XXXXXXXX XXXXXXXXXX in XXX open market), reserve requirements (the amount of reserves banks have XX hold XX a XXXXXXXX of their XXXXX assets), and interest XXXXX (the ‘XXXXX’ XX money in an economy). XX XXXXXXX, the XXXXXXX XXXXXXX mainly XXXX XXXX market operations, XX their XXXXXX XX immediate, XXXXXXX and XXX be XXXX in a number XX hours. XX XXXXX XXXXXXXX XX XXXXXX loans to reserves, XXXXX XXXXXXXXX try to set their reserve XXXXXXXXXXXX XX the level they anticipate the central bank will XXX. This XXX of XXXXXXXXXXXX typically renders XXX use XX XXXXXXX requirements XX XXXXXXXXX money supply XXXXXXXXXXX, XXXXXXX XXXXXXX banks XXXXX XXXXXXX XXXX anticipated it beforehand. (Woolley, 1985) Furthermore, the XXXXXXXX XXXX XX not very XXXXXXXXX in influencing XXX money XXXXXX as it has XX assume XXXX private XXXXX XXX borrowing XXXXXXXX from the Federal XXXXXXX, when in reality, XXX XXXX between XXXXXXX bank loans XXXX XXX XXX XXX XXX XXXXXXXX rate XX tenuous at best.<span XXXXX="Apple-XXXXXXXXX-space"></span></span></p> <p><span XXXXX="XX"></span> </p> <p><span XXXXX="XX">Monetary XXXXXX involves the expansion or contraction of the money XXXXXX, and the increase or decrease XX XXXXXXXX rates. As a result, it XXX a XXXXXXXXXXX XXXXXX XX XXXXXXXXXXXXX XXXXXXXXXX such as XXXXXXXXXXXX, XXXXXX and XXXXXXXXX. X contractionary monetary XXXXXX, XXXXX the central bank XXXX XX restrict the money XXXXXX XXX XXXXX interest rates, XXXXXXXXX leads XX a XXXX in XXXXXX rates, a rise in XXXXXXXXXXXX XXXXX, XXX a XXXX in XXXXXXXXX rates. This is because contractionary monetary policy XXXXXXXXX XXXXXXXXX XXX XXXXXX XX XXXXX and liquidity in an XXXXXXX, which XXXXXX consumers XX XXXXXXX XXXX (XX. XX XXXXXX out loans for cars, home mortgages, XXX.) and XXXXXXXXXX to XXXXXX XXXX. XXXXXXXXXX, an expansionary monetary policy, XXXXX XXX central bank XXXX XX increase XXX money supply XXX lower XXXXXXXX XXXXX, typically leads to a XXXX in XXXXXX rates, a XXXX in unemployment XXXXX, XXX a rise in XXXXXXXXX XXXXX. XXXX is XXXXXXX XXXXXX the XXXXXXXX supply XXXXXX XXXXXXXXX and XXXXXXXXXX to XXXXX and XXXXXX XXXX (with credit more easily XXXXXXXXX), XXXXX spurs growth and XXXXXXXXXX XXX is also inflationary in XXXXXX. (Woolley, XXXX)</span></p> <p><span XXXXX="XX"></span> </p> <p><span XXXXX="s1" <XXX="" XXXXXXXXXXXX="" XX="" monetary="" XXXXXX="" required="" to="" balance="" growth,="" XXX="" XXXXXXXXX="" XXX="" a="" reasonable="" rate="" unemployment="" XXX="" XXXXXXX,="" XXXXX="" done="" XXXXXXXXXXX="" at="" the="" jurisdiction="" XXXXXXX="" XXXXXXX.="" reserve="" typically="" XXXXXXX="" 5%="" (which="" only="" XXXXXXXX="" XXXXXXX="" in="" any="" XXXXX="" XXXXXXX),="" an="" 2="" 3%,="" XXXXXX="" X="" modern="" economy.="" XXXXX,="" if="" XXXXXXX="" is="" XXXXXXX="" too="" XXXX="" inflationary,="" contractionary="" XXX="" XX="" implemented="" order="" XXXXXX="" XXXXX="" XXXXXX,="" XXXXX="" XXXXXXXX="" XXXXX,="" boost="" expenditure="" businesses="" consumers.=""></span></p> <p>The XXXXXXXXXXXX XX monetary XXXXXX XXXXXXXX XX XXXXXXX growth, low inflation XXX a reasonable rate of XXXXXXXXXXXX are complex, and XXX XXXXX done imperfectly at XXX XXXXXXXXXXXX of XXX XXXXXXX Reserve. XXX XXXXXXX Reserve XXXXXXXXX XXXXXXX a reasonable rate XX unemployment of 5% (which XXXX reflects the XXXXXXX XXXX XX unemployment in XXX given XXXXXXX), an inflation rate to X to X%, XXX a XXXXXX rate of X XX 5% in a XXXXXX XXXXXXX. Hence, XX XXX XXXXXXX XX XXXXXXX too XXXX XXX XX XXXXXXXXXXXX, XXXXXXXXXXXXXX XXXXXXXX policy XXX to XX implemented in order XX XXXXXX the money supply, lower XXXXXXXX XXXXX, and XXXXX XXX expenditure XX XXXXXXXXXX XXX consumers. (XXXX, XXXX) XXXXXXXXXX, XX XXX XXXXXXX XX growing XXX XXXXXX and XX contracting, XXXXXXXXXXXX XXXXXXXX policy XXX XX be XXXXXXXXXXX in order to XXXXXXXX XXX money XXXXXX, XXXXX XXXXXXXX rates, and lower the XXXXXXXXXXX of XXXXXXXXXX XXX XXXXXXXXX. XXXXXXX, XXX ability of the central bank to XXX XXXXXXXXXXX of XXXXXXXXX XXXXXXXXX XXX been XXXXXXXXXXXX threatened, given that it is XXXXXXXXX to obtain a XXXXXXX to restrict XXXXXX in a time XX a XXXXXXX economy. (Wray, 1998)<br></p><p></p> <p><XX></p> <p></p> <p><span class="s1">In XXXXXXXXXX, money is XXXXXXX XXXXXXX XXX Federal XXXXXXX’s use of XXXX XXXXXX operations, reserve requirements and interest XXXXX, XX well as XXXXXXX XXXXXXXXXX XXXXXXXX and the use of XXX printing XXXXX. XXXXXXXXXX banks contribute to this XXXXXXX XX XXXXX XXXXXXXXXX reserve banking to XXXXX XXXXX and XXXXXX money implicitly, XXXXX XXXXXXXXXXX XXXXXXXXXX XX XXXXXXX their spending. XXX XXXXXXX Reserve’s preferred XXXX XX XXXXXX to XXXX XXX money XXXXXX is XXX open market operations process, XXX the Federal XXXXXXX XXX to pursue XXXXXX XXXXXXXXXXXXXX or expansionary XXXXXXXX policy, depending on the state of the economy, in order to XXXXXXXX the appropriate level XX XXXXXXXXX, XXXXXX and unemployment in the economy.<span class="Apple-XXXXXXXXX-XXXXX"></span></span></p> <p><span XXXXX="XX"></span> </p> <p><span XXXXX="XX">References</span></p> <p><span class="s1"></span> </p> <p><span XXXXX="s1">Clarida, X., XXXX, J., & Gertler, M. (XXXX). XXXXXXXX XXXXXX XXXXX XXX XXXXXXXXXXXXX XXXXXXXXX: evidence XXX XXXX XXXXXX.<em>XXX Quarterly XXXXXXX of economics</em>,<em>115</em>(1), XXX-180.</span></p> <p><span class="XX"></span> </p> <p><span XXXXX="XX">XXXXXXXX, X. (1995). The role of monetary policy. In<em>Essential XXXXXXXX in Economics</em>(XX. XXX-XXX). Palgrave, London.</span></p> <p><span class="s1"></span> </p> <p><span XXXXX="s1">XXXXXX, X. L. (XXXX).<em>The monetary policy XX the XXXXXXX XXXXXXX: a history</em>. XXXXXXXXX XXXXXXXXXX XXXXX.</span></p> <p><span class="XX"></span> </p> <p><span class="s1">XXXXXXX, X. X. (1985).<em>XXXXXXXX XXXXXXXX: XXX XXXXXXX Reserve XXX XXX politics of monetary policy</em>. XXXXXXXXX University Press.</span></p> <p><span XXXXX="s1"></span> </p> <p><span XXXXX="s1">Wray, L. X. (XXXX). Understanding XXXXXX XXXXX.<em>Books</em>.</span></p> <p><span XXXXX="s1"></span> </p>">
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