Wednesday 916

Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed.

PART 10 Money and Prices in the Long Run
Chapter 29 of 36 The Monetary System
Section 16 of 20
…
The Federal Reserve (Fed) controls the economy’s money supply.
The Fed's control is indirect because banks create money not the Fed.
So, when the Fed decides to change the money supply, it must consider how its actions will affect the banking system.
The Fed has three tools for changing the money supply
-1- open-market operations
-2- reserve requirements
-3- the discount rate
…
-1- Open-Market Operations
The Fed conducts open-market operations when it buys and sells government bonds that the Treasury has previously sold to the public.
A- To increase the money supply, the Fed instructs the bond traders at the New York Fed bank to buy government bonds from the public.
The new dollars created from air by the Fed to pay for the bonds increase the number of dollars in the economy.
The new dollars received by those in the public who sell their bonds to the Fed are mostly deposited in banks.
Most of the new deposits at banks are loaned out, creating money.
…
B- Conversely, to reduce the money supply the Fed instructs the New York Fed’s trading desk to sell U.S. government bonds that were originally issued by the Treasury and are currently held by the Fed.
The public pays for these bonds with bank deposits.
This money is then destroyed, taken off the books, by the Fed.
As people make withdrawals from banks to buy these bonds from the Fed banks must reduce their lending amount and the economy’s money supply is decreased.
…
The Fed's purchases and sales of government bonds in the nation's bond markets are similar to the transactions any individual might make.
The main difference is when an individual buys or sells a bond from/to another individual on the bond market, money changes hands.
But the amount of the economy’s money supply remains the same.
Because of its ease of use and large impact, open-market operations
is the main tool the Fed uses to control the amount of money in the economy.
…
When the Fed increases the money supply interest rates decrease, resulting in faster economy growth but more inflation.
When the Fed decreases the money supply interest rates increase, resulting in slower economy growth but less inflation.
… …
the main difference
omo na chigai
主な違い
… …
What determines whether the Fed wants to increase or decrease the money supply? ChatGPT:
The Fed decides whether to make increase or decrease the money supply by looking at inflation, employment, and the overall strength of the economy.
-If inflation is too high, it decreases the money supply — raising interest rates thereby decreasing the amount of spending by individuals and businesses, which reduces inflation.
-If unemployment is high and economic activity is weak, the Fed increases the money supply which lowers interest rates thereby increasing the amount of spending by individuals and businesses, but can cause inflation.
The Fed generally targets a two percent inflation rate.

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