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 : Public debt How does an internally held

    How does an internally held public debt differ from an externally held public debt?

  • Q : Market imperfection associated with

    Question: This assignment in Economics, deals with macro-economics. An essay on Market imperfection associated with negative externalities. According to Economics, perfect markets would require an "invisible hand" to allocate all the resources to be a

  • Q : Interest receipt Why is interest

    Why is interest received classified as revenue receipt?

    Answer: Interest received is a revenue receipt since it does not build any liability nor it leads to the red

  • Q : POSSIBILITIES Possibilities Food

    Possibilities Food (millions of tons per year) Tractors (millions per year) A 0 30 B 4 28 C 8 24 D 12 20 E 16 14 F 20 8 G 24 0 a. Is it possible for this nation to produce thirty million tons of food per year? Why or why not. b. Is it possible for this nation to produce thirty million

  • Q : Resolving disequilibrium between the

    Assume that you consume bananas and apples, and the marginal utility of the last apple consumed is 6 times the marginal utility of last banana consumed. Though, the price of apples is only 3 times the price of bananas. This disequilibrium among the two goods can be re

  • Q : Aggregate Expenditure model Describe

    Describe Aggregate Expenditure model and also state AD/AS model?

  • Q : Fox I don't know how to make him stop

    I don't know how to make him stop dancing

  • Q : What points out revenue deficit What

    What points out revenue deficit?

    Answer: Revenue deficits are stated as the surplus of revenue receipts.
    Revenue Deficit = Revenue Expenditure - Revenue Recei

  • Q : Shifting of demand curve due to new

    Assume that the launch of Microsoft Xbox 360 moved the demand curve for Sony PlayStation 2 games from D0 to D1 throughout similar period if new game designers enter into this market and hence supplies of PlayStation 2 games shifted S0 to S1. The market equilibrium: (1

  • Q : Self consumption-Value of output

    Illustrate whether output generated for self consumption is comprised or not comprised in the value of output?

    Answer: The output generated for self consumption is

2015 ┬ęTutorsGlobe All rights reserved. TutorsGlobe Rated 4.8/5 based on 34139 reviews.