Economy 1

• Higher interest rates to promote people to keep money and cash in banks , prevents spending in the economy as loans are not attractive anymore (too much interests to be paid)

How?

1.Buying and selling treasury bonds through open market opertaions.

   - increases money supply by FED purchasing   treasuries from securities dealer.

1. Settling the interest rate/ discount rate.

   - Banks with good credit ratings pay on overnight loans call the discount rate.Banks with worse reputations borrow at higher rates.
   

3.Establishing reserve requirements.

- Basically telling banks what requirement of money they must have on hand of customers.(e.g 10%)

The rest of the 90% of money is traded and loaned to other banks through their district federal reserve banks (FRB).

 -  The amount of bank reserves affects the short term interest rates because of the amount they loan out or borrow  from FRBs to maintain their reserve requirements set by FED.

- As a result , reserve levels affect the interest rates banks charge consumers which influences the entire country's  willingness to spend , influencing inflation.

FISCAL POLICIES

Is a means by which the government , adjusts it's spending levels and tax rates too monitor and influence a nations economy.

Monitary policies -

control money supply through interest rates , assets purchases and inflationary measures.

Fiscal policies - control spending level and tax rates.

How fiscal policies stimulate the economy

● lower tax rates

  Allows the pubpic to keep more of their earned income, thus more consumer spending , driving economic activity forward. 

● The issue

 With fiscial policies is that it is very much driven  by the population and its voters which means it is not always backed up by essential data required to know the best decision at that time.

BUDGET DEFICIT

This happens when expenses exceed the revenue so the budget of a country cannot afford its expenses.

National debt

 The sum of budget deficit by the federal government. 

The government deals with national debt by borrowing to avoid bankruptcy

Good :- If these loans are taken to make investments into the country positively such as into infrustructure.

Bad:- If loans are taken to pay unsustainable issues but is required to be done ( such as recovering from natural disasters , wars.....

How to recover:

1. Use of fiscal policies (lowering taxes too much can cause issues longterm by not being able to fund anything) :- reducing taxes to improve economic growth .

2. Use of monetary policies (too much can lead to hyperinflation) :- print money , asset purchase of bonds or MBSs etc .

QUANTITATIVE EASING

Is aform of unconventional monetary policy in which a central bank purchases longer term assets ( bonds and MBS)

The goals:-

1. Increase money supply.
2. Stimulate economic activity.
3. Inflation is expected but only with      intended econonic growth . Stagflation : - when there is increased in inflation but not the intended economic growth.

Why it is used:-

    It is because lowering interest rates is not effective anymore since they are near  0% so they need another method. 

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