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Monetary Policy: money, credit, the Federal Reserve, interest - Essay Example

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Originally, the Federal Reserve System was employed to exercise control on member banks’ reserve requirements in order to have a viable degree of liquidity to meet demands for unexpected and large cash withdrawals (Horvitz et al 1993). Such bank reserves are not legally…
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Monetary Policy: money, credit, the Federal Reserve, interest
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Download file to see previous pages eserve requirements affects current interest rates particularly the short term rates since the reserve operations comprise of the sale and purchase of government securities that are short term (Keleher 1997), thus controlling the prevailing interest rates. Long term rates are likewise affected and can only be sustained through the endorsement of price stability among susceptible sectors of the economy that involves key interest rates (Keleher 1997). Economic stability requires that prices within the broad range of industries must be stable. It follows that an internal balances and external balance must be achieved with regards to the balance-of-payments (BOP) position. If a fixed-exchange rate system is followed, an expansionary monetary policy worsens the BOP position, while a contractionary monetary policy improves the BOP position (Carbaugh 1998). On the other hand, an expansionary fiscal policy directs to a decline of the trade account and a step-up in the capital account. The overall BOP is affected and reliant on the comparative strength of these two conflicting forces in the economy (Carbaugh 1998).
following: 1) the credit standing of the borrower, 2) the differences in maturity of debts or securities and 3) other institutional reasons (Horvitz et al 1993). The economic role of lending is to transfer existent funds from the lender to the borrower (Horvitz et al 1993). Thus, aside from having a good credit standing in order to secure a loan, individual lenders and institutions impose interest rates basically on the yield or output they will eventually gain should the borrower either make a loan for a short or long period of time; which is normally in months or years respectively (Horvitz et al 1993). As such, yields on long term debts will usually fluctuate more in price than short-term debts. Although the rates for short term loans will likewise fluctuate, it will not move as much as those made for longer durations (Horvitz et al 1993). ...Download file to see next pagesRead More
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