Ano Ang Tatlong Uri Ng Contractionary Money Policy
Restrictive monetary policy can have far-reaching effects on an economy. The following effects are the most common: as might be expected, it is implemented during the opposite period of a business cycle: a period of contraction in which the economy slows down and GDP declines. Runaway inflation is not a common problem. This, combined with the fact that governments want a growing economy, means that contractionary monetary policy has not been used as often. These measures effectively tighten the money supply. Individuals and businesses have less money to spend, and what they buy – directly or by borrowing – costs them more. A contractionary monetary policy is usually conducted by a central bankDensign Reserve (the Fed)The Federal Reserve is the central bank of the United States and the financial authority behind the world`s largest free market economy. or a similar regulatory authority. The central bank usually sets a target for the rate of inflation and uses the monetary policy of contraction to achieve the target. In episodes 7 and 8, the Federal Reserve pursued accommodative monetary policy, lowering the federal funds rate from 6.2% in 2000 to just 1.7% in 2002 and then to 1% in 2003. In fact, they did so out of fear of Japanese-style deflation; This convinced them to cut federal funds more than they would have otherwise.
The recession ended, but unemployment rates slowly declined in the early 2000s. Eventually, the unemployment rate fell in 2004 and the Federal Reserve began raising the federal funds rate until it reached 5% in 2007. If the Fed raises any of these interest rates, it becomes more expensive for banks to borrow money, so they have less money to lend to customers. There is also a trickle-down effect: banks also increase the interest rate they charge customers to borrow. These examples suggest that monetary policy should be counter-cyclical; that is, it should serve as a compensation for economic cycles of economic slowdown and recovery. Monetary policy should be eased when a recession has led to an increase in unemployment and tightened when inflation threatens. Of course, countercyclical policies carry the risk of overreaction. If loose monetary policy that seeks to end a recession goes too far, it could push aggregate demand so far to the right that it triggers inflation. If a restrictive monetary policy that seeks to reduce inflation goes too far, it could push aggregate demand so far to the left that a recession begins. Figure 3(a) summarizes the chain of effects that combine loose and restrictive monetary policy with changes in output and price levels.
Of course, financial markets have a wide range of interest rates that represent borrowers with different risk premiums and loans to repay over different periods of time. In general, when the federal funds rate falls significantly, other interest rates also fall, and when the federal funds rate rises, other interest rates rise. However, a one-percentage-point drop or increase in the federal funds rate — a reminder that it is an overnight loan — typically affects a 30-year loan to buy a home or a three-year loan to buy a car. Monetary policy can push the entire spectrum of interest rates up or down, but specific interest rates are determined by the forces of supply and demand in these specific markets for lending and borrowing. An expansionary (or loose) monetary policy raises the supply of money and credit beyond what it would otherwise have been and lowers interest rates, stimulating aggregate demand and thus counteracting the recession. A monetary policy of contraction, also known as restrictive monetary policy, reduces the supply of money and credit below what it would otherwise have been and raises interest rates to keep inflation low. During the 2008-2009 recession, central banks around the world also used quantitative easing to increase the supply of credit. So how can a central bank “raise” interest rates? When describing a central bank`s monetary policy measures, it is common to hear that the central bank has “raised interest rates” or “lowered interest rates.” We need to be clear about this: specifically, through open market operations, the central bank changes bank reserves in a way that affects the supply curve of solvent assets. As a result, interest rates change, as shown in Figure 1. If they don`t meet the Fed`s target, the Fed can provide more or less reserves until interest rates are sufficient. If the PCE index of core inflation is well above 2%, the Fed is implementing a monetary policy of contraction.
To reduce the money supply, the central bank may choose to increase the cost of short-term debt by raising the short-term interest rate. As commercial banks, rising interest rates are also affecting consumers and businesses in the economytop banks in the U.S. According to data from the U.S. Federal Deposit Insurance Corporation, there were 6,799 FDIC-insured commercial banks in the U.S. as of February 2014. increase the interest rates they charge their customers. A well-known economic model called the Phillips curve (discussed in the chapter The Keynesian Perspective) describes the short-run trade-off generally observed between inflation and unemployment. Based on the discussion of expansionary and contractionary monetary policy, you explain why one of these variables generally decreases when the other increases. When this happens, a central bank will aim to increase the money supply, which will facilitate borrowing and issuance. And it uses the same monetary tools, but in the opposite way. When there is no demand, companies sell fewer goods and services, which reduces profits, forces them to cut costs and lay off workers, which increases unemployment, which leads to less money in the economy, which further reduces demand.
The opposite of a contractionary monetary policy is an expansionary monetary policy. To cool this overheated economic engine, a country`s central bank will implement a contractionary monetary policy to slow rapid growth and price increases. Central banks have many monetary policy instruments at their disposal. The first concerns open market operations. This is how federal reserve instruments are used in the United States To reduce the money supply, economic growth generally slows. When the money supply in the economy decreases, individuals and businesses typically stop investment and larger investments, and firms slow down their output. Another step the Fed is taking to contract the money supply is to sell U.S. Treasury bonds and notes – a process known as open market operations. Of course, the trick with a contractionary monetary policy is to gently contain the galloping economy, but never stop it completely.
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