LA Business Daily
How can the Federal Reserve influence banks’ willingness to expand or contract the money supply?
Explain the role of banks in determining the money supply in the United States. How can the Federal Reserve influence banks’ willingness to expand or contract the money supply?
Public Comments
- actually the feds are the ones sort of dictating the money supply. these are done by increasing/decreasing bank reserves at a given time, or by increasing/decreasing interest rates, etc. Not the other way around.
- There are two principle ways the money supply changes. 1) The Federal Reserve changes the base money supply (M0) by buying and selling T-Bills on the open market using 'thin air' money 2) The rest of the measure for M is based on bank loan activity. Generally bank will lend more when they have excess reserves. When the Fed buys a T-bill from a bank, it will increase their excess reserves. A more indirect way to encourage bank to lend money is to simply raise confidence by taking positive action against adverse economic conditions.
- Most money is created via private loans. The Federal Reserve's job is to make sure the private world keeps loaning money. "Open Market Operations", "Reserve Requirements" and the "Discount Rate" are the Federal Reserves tools for keeping the money flowing. Federal injections of money (by any of these means) equate to future inflation.) The market goes down because injections equate to inflation and the people with money to invest are concerned that future inflation (coupled with taxes) will outpace there benefits from investing in a business activity. The investors are moving to real items (such as gold). Therefore, when the fed lowers rates, the private loans continue to shrink and jobs shrink. This is what is known as stagflation (interest rates and unemployment both increase). Here is a good description of how the Federal Reserve manipulates the economy: http://www.a2dvoices.com/realitycheck/markets/
