Bond Fundamentals – Monetary Policy and Fiscal Policy
It’s the Federal Reserve Bank that influences the money supply. Three tools are used to implement monetary policy:
1. Open Market Operations
2. Discount Rates
3. Reserve Requirements
Since open market operations is the tool used most, we will cover it. Here’s how it works: When the economy is growing too fast and the Fed is worried about the inflation rate, it will sell government securities from its portfolio to the open market. This decreases bank reserves, which means the money supply decreases. When there are less bank and businesses have to pay the bank more in order to borrow. This discourages consumers and businesses from borrowing. Less borrowing means less spending, which slows the economy and eventually can reduce price pressures.
When the economy is growing too slowly and the inflation rate is low the Fed will buy government securities, such as Treasury bills and notes. This increases bank reserves, which increases the money supply and causes short-term interest rates to decrease. Reduced rates induce consumers and businesses to borrow. Consumers will borrow money for items such as automobiles or home loans. Businesses borrow to build their inventories or finance a new factory. As a result, economic growth will accelerate.
The Fed will also leave rates unchanged if the economy is growing at a moderate pace with low inflation or if they feel the economy will slow down by itself. They will even take a wait-and-see approach with regard to how slowly the economy is growing and the rate of inflation, before determining monetary policy.
The bond market plays close attention to the activities of the Federal Reserve, which is why it’s important for us as well.
The Federal Reserve has three goals:
1. Moderate economic growth (not too fast, not too slow)
2. Low unemployment
3. Low inflation
How does the Fed determine whether they are reaching these goals? They watch the same economic indicators as we do. In other words, they monitor the reports that are released by the Labor Department, the segments of our economy.
For instance, the Gross Domestic Product (GDP) consists of four major components: (1) consumption; (2) investment; (3) government; (4) exports. Most of the key economic indicators fall into one of the above categories. For example:
- Retail sales would fall under consumption.
- Business inventories and housing starts would fall under investment.
- Construction Spending would fall under government.
- Trade would fall under exports.
If the key economic indicators continue to come in strong, the GDP will increase. If the indicators come in weak, it will decrease. In other words, Gross Domestic Product measures economic growth.
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Question about monetary
How does expansionary monetary policy promote economic growth in the economy?How does expansionary monetary policy promote economic growth in the economy?
Here is what I know:
Expansionary monetary policy promotes the growth of money supply by purchasing government bonds, lowering the reserve requirement, and lowering the federal funds interest rate.
But how does expansionary monetary policy expand economic growth? I dont get that at all, help please
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18 Responses
The U.S. went into the current recession as a consumer-driven economy: consumption in the US accounted for approximately 70% of GDP. But now consumers are deep in debt. Household debt went up to 140 percent of personal income, up from less than 80 percent in 1990. Households are struggling to pay it down, and this process could take years. Meanwhile, frightened consumers will be saving more: In the current recession, for example, the net financial balance of the private households has risen from -3.6% of GDP in 2006 to +5.6% in the first quarter of 2009. Such large increase in savings translates in a decline in consumption and means falling sales, production and further declines in GDP. This trend will put the US finances in better shape and reduce its dependence on foreign investment, but it will also restrict economic growth in 2010 and beyond. The bottom line: Consumer spending may pick up a bit as the recession fades, but it will not lead the way out of the recession.
Possible policy measures: (1) tax cuts, (2) monetary expansion, (3) government spending.
(1) With the increased savings rates, tax cuts are not an effective policy because a large portion of the additional disposable income generated by the tax cuts will be saved and not spent.
(2) With interest rates roughly zero and a recession that is the fruit of past irrational exuberance, conventional monetary policy has run out of room. The economy is likely in or close to a liquidity trap where monetary policy is ineffective since the interest rates cannot fall any further.
(3) Bottom line, this means that there is not much alternative than old fashioned fiscal policy in form of huge stimulus package(s) which will pull the economy out of the recession.
I'm sorry, but if you can't afford the child you shouldn't take him/her. I'd love to adopt several more children but know my limits. You should, too. It's not only your future that you are playing with.
prepare for the bartering system
It doesn’t look so good does it? I won’t live in fear but I’d rather be safe than sorry and prepare. But most of all I will get busy doing what ever I can as a citizen to determine in what ways to work towards bringing this to an end. Mails, blogs, letters, faxes, marches, protests whatever it takes short of violence is what I am willing to do to help save this country for my children.
It’s done, jump on hard assets especially gold and silver to prepare. Also, keep food, weapons and ammo because with this type of decline there will be some rough times. Hell, I bought a chainsaw last year and I’ve been stocking up wood like crazy. Just do whatever you can.
Think about it. If there is more money in the economy, money is more readily available. Consumers and firms are more willing to borrow money since they do not have to pay as high an interest rate on it as they did before, and thus economic activity increases.
Do not let fear take you over. Go to my page. I believe my outlook is the answer. Many are implementing this outlook. We are not powerless. Do not let fear take you over.
~Namaste
Ultimate goal: One world currency
@jobedied True Job True..Thanks for telling people this very truth..
hahahaa you americans are realy stupid
@Autotee2 You are right about this Autotee this is all in the Bible..TRUST AND LOVE GOD WILL ALL YOUR HEARTS>>JESUS IS KING OF KINGS AND LORD OF LORDS>>HIS KINGDOM WILL COME>>
Try to get as much growth with the least amount of inflation. Which is what they are doing now with a target inflation rate around 2%
It depends on how big the monetary base is.
According to monetarist theory the inflation rate is equal to the Quantity of Money X Velocity
Velocity of money measures the rate at which the money circulates in the economy. Low demand or spending would imply a low velocity in the currency.
Therefore, in theory, a low velocity of money coupled with a relatively large quantity of money would equal about the same inflation rate as a high velocity with a smaller quantity of money.
For example, the Fed can expand the money supply by printing more dollars to make open market purchases, lowering the bank to bank lending, but if high money demand should persist, it would result in low velocity and the inflation rate wouldn't change much. This is why it's possible to increase the money supply to a large extent and still not see inflation.
I don't think monetary economists care as much about a constant velocity of money, as they do in the rate of change of the velocity of money in a given time period. A positive change signals healthy demand while a negative change signals deflation.
Anyhow, you sparked my interest in this Issue again and I'm going to do some more reading on it. By the way, here's a pretty good source below.
explosions and crowd movement are those. I saw this film @ MovieWatcher[.]US
Sure, but it is not tax deductible.
In very simple terms, monetary policy is control of the economy by controlling interest rates and fiscal policy is government actions via their budgets (tax and spending). Although monetary policy is a 'get them all' approach, fiscal policy can be directed toward specific industries. The influences of certain Monetary policies that adversely certain industries can be overcome in budgets (fiscal policies) to overcome these adverse affects.
You can offer a bonus, or a higher commission on the MLS. In Texas, you cannot make the bonus contingent upon anything other than selling the house – for example, you cannot put "2K bonus for full price offer".
Commissions are not set, but it's not hard to figure out what the averages are in any given market. And I'd never thought that "the BEST agents always show their buyers the houses with the higher commissions", I always thought that fell to the "easiest to buy-off agents". But I do recognize that MANY agents will show a listing because of the higher commission offered – for this reason, I do recommend a higher commission (my side stays the average) be offered to the buyer's agent when I take a listing.
On the flip-side, I've sold many good deals to my buyers because there was no competition for a house that offered a less than average commission. I made less on that kind of transaction, but all their friends and relatives want me as their Realtor later – so I make more for that transaction.
7 years from date of last activity ..
GoOD LucK!