--%>

Utilization of Bond market to make and destroy money

How does the FED utilize the bond market to make and destroy money? Which technique do developed countries utilize to decrease the chance of experiencing inflation? What about the Banana Republicans and inflation, do they have this means acessible to them?

E

Expert

Verified

The bond market is a frequently used tool for creating or destroying money. When the Fed wants to create money, it purchases the government securities from dealers, so that the dealers’ bank accounts will be credited. The dealers are most probably the banks and when banks have more deposits, they have more to lend to the economy and thus money is created by purchase of bonds by the Fed. Similarly, when the Fed wants to destroy money, it sells government securities to dealers, so that the dealers’ bank accounts will be debited. When banks have fewer deposits, they have less to lend to the economy and thus money is destroyed by sale of bonds by the Fed.

Inflation occurs when the money supply has largely exceeded demand. In order to reduce the chance of experiencing inflation, money supply needs to be lowered or money has to be destroyed and hence the Fed will sell more of government bonds. In this case, the prices eventually drops and interest rates increase thus reducing the chance of experiencing inflation. Banana Republics refer to nations which propose public policies entirely to benefit private corporations for exploiting the public lands and the debts, if any, incurred will be public responsibility. Thus such republics have unstable politicians and hence they do not care for inflation or any such issues. Since Banana Republicans do not concern about public property or the public in general, they certainly do not have any inflationary control measures.

   Related Questions in Macroeconomics

  • Q : Explain reason why land Land, capital

    Land, capital and labor are all scarce since: (1) advertising mainly over stimulates human wants. (2) once employed they cannot be used again. (3) each productive resource needs a monetary return for its employ. (4) inheritance under a capitalism prot

  • Q : Problem of Financial Capital for direct

    The direct economic resources a farmer employs to generate avocadoes would not comprise: (I) human capital in form of expertise regarding growing avocadoes. (II) fertile land. (III) loans from a bank to finance SUCH year’s crop. (IV) machinery,

  • Q : Steps to analyze modifications in

    What are the Steps to analyze modifications in equilibrium?

  • Q : Stage of the business cycle What stage

    What stage of the business cycle is our economy experiencing at present time? proof your answer.

  • Q : Greatest Consumer Surplus problem I

    I have a problem in economics on Greatest Consumer Surplus. Please help me in the following question. Usual Americans undoubtedly derive the greatest consumer surpluses from the: (i) Summer vacations. (ii) Jelly and Peanut butter. (iii) Gold jewellery

  • Q : Define revenue receipts Define revenue

    Define revenue receipts. Write the groups in which they are categorized. Answer: Any receipts that do not either make a liability or lead to reduction in assets is

  • Q : Full-employment Define the "

    Define the "full-employment" or "natural" rate of unemployment and give its approximate percentage rate as economists currently define it.

  • Q : Microeconomic and macroeconomic effects

    Predictions which restricting international trade to protect specific industries and “infant” firms would (a) inefficiently decrease aggregate output and employment, (b) raise the market power of the protected firms and their workers, and

  • Q : Fiscal measures to accurate

    Describe the fiscal measures to accurate the condition of deficient demand and excess demand. Answer: Fiscal measures are the government’s budgetary policy th

  • Q : Signals that guide economic decisions

    In market economies, what are the signals which guide economic decisions?