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The Federal Reserve enlarged the US monetary base by 155 percent in a period of four years. There was a contraction in monetary base that caused a recession in 1937…
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Download file to see previous pages This led to permanent contract of money supply in the economy. This inflicted a severe damage to the financial stability of the US economy instead of increasing real quantities of money. The consumer price index at that time shows that the Fed was making several policy errors out the fear of increased inflation. The public interest considered a sacrifice for the inflation.
In todays current world, the most commonly used way of producing money in the economy is through bank lending. When a commercial bank lends money to customers, firms and government organizations, it issues new money to the economy thus increasing the stock of money in the economy. Scholars in the Australian School of economics refer to this kind of producing money as ‘creating money out of thin air’. This is because the increase in money through the circulation of bank credit does not necessarily require the existence of actual savings (Ryan-Collins & Josh 78).
In most cases, banks do not lend out reserves as loans. People may wonder why banks do not give out money to customers as loans yet they have enough deposits and reserves. Well, economists tend to explain this. Most of the people and businesses who took loan initially are now concentrating in paying the loan thus increasing the amount of reserves for the banks. In 2009, the US experienced a significant fall in the levels of loan creation. This is because damaged banks are very much reluctant to lend out money, fearful people do not want to invest in businesses that they tend to fear risks associated with borrowing money. In addition to these two factors, you still find that damaged households are afraid of borrowing money. The mixture of these three factors causes the level of demand and supply for money in the economy to reduce significantly. Nonetheless, banks are still lending out money but not at the same rate, they were doing it before the Great depression (Ryan-Collins & Josh 78).
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