Eco Assignment Essay Example | Topics and Well Written Essays - 1500 words

Eco Assignment - Essay Example are the amount of funds that commercial banks must hold in reserve against deposits, and third, is by changing the discount rate or interest rate charged to commercial banks.( Shad Satterthwaite) These tools are used to increase or decrease money supply. For example, when the government wants to control inflation, the Federal Reserve can sell government securities to raise money. This money will be used to alter banks’ reserve thereby reducing money circulation. When there is a smaller supply of money, there would be less to spend which would eventually lower the prices of goods. Federal Reserve may also increase interest rates making it more expensive to borrow. In this case, consumers will rather save which in turn will result to lowering of prices. The reverse process can be done to increase money supply. The effect of monetary policy can be described in the following scenario. To the man on the street, monetary policy doesn’t make sense; news about easy or tight money could go unnoticed, for after all, he receives exactly the same take home pay, eat the same food on the table, and can still purchase the same amount of goods on credit. However, let us consider this situation in business places where â€Å"easy† and tight† money could be readily observed. At one time or the other, we see offices busy with extra activities, while in another setting, we see the office like nothing is happening. Upon study, we see that the extra activities are brought about by expansion plans made possible by the easy monetary policy for investments. On the other hand, when money is tight, business activities are almost idle and there are no plans for expansion. Monetary policy is a move to regulate the supply of money that causes upward or downward changes in the amount of funds available to investors and producers. To regulate the supply of money, the Central Bank Federal Reserves must strike a balance between the demands for fund for growth and requirements of