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Inflation and Unemployment - Assignment Example

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The paper " Inflation and Unemployment" presents that monitory policy is a tool for the federal bank to control unemployment and inflation. But before going into the details of how monitory policy can be used for the two objectives, we will discuss some key terms…
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Inflation and Unemployment
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Download file to see previous pages Reserves of commercial banks are one from of liabilities of federal bank .the imposition of reserve requirement from federal bank results this liability. Treasury deposits are also a liability for the federal banks since there are deposits made by treasury department of states. Federal Reserve notes are the notes circulated by federal banks in the country in the form of paper money. They are the claims against the assets of the federal bank and hence become a liability for the federal bank.
Since we know that one of the core functions of a federal bank is the creation and control of money in the economy, the monetary policy acts as an action plan for this purpose. The federal bank has three core tools to control the money supply in the market
Since bonds are floated in the market by the government and other organizations to raise money, they can be used by the federal bank to increase or decrease the money supply. The federal bank can either buy or sell bonds with commercial banks or the general public. Buying securities from commercial banks the reserve of commercial bank are increased while the assets base of federal bank increases. The same thing happens when the federal bank buys securities from the public, the asset base of the federal bank increases as well as that of commercial banks. Overall the money at the disposal of federal bank increases which increases the money supply n the market.
The Reserve ratio is the amount of reserve of a commercial bank that they are required to keep with the federal bank. This reserve is not allowed to be loaned to the public. A federal bank, when want to increase the money supply in the market decreases the reserve ratio which in turn decreases the reserve of commercial banks kept with the federal banks. With the increased money at the disposal of the commercial bank, they are able to load out more money in the market which increases the money supply.  ...Download file to see next pagesRead More
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