Belhaven University Unit 7 Banks Money & Monetary Policy Responses

*Instructions: There are 2 responses. Write a 100 word response for each one.

Response 1:) Raven

Banks and money are intertwined. It is not just that most money is in the form of bank accounts. The banking system can literally create money through the process of making loans the money multiplier depends on people re-depositing the money that they receive in the banking system. If people instead store their cash in safe-deposit boxes or in shoeboxes hidden in their closets, then banks cannot recirculate the money in the form of loans. Indeed, central banks have an incentive to assure that bank deposits are safe because if people worry that they may lose their bank deposits, they may start holding more money in cash, instead of depositing it in banks, and the quantity of loans in an economy will decline. Required reserve ratios are defined as the ratio of reserves to a specified liability category (for example, checkable deposits) that banks are required to maintain (Gwartney et al,. 2018). If the required reserve ratio is the banking system will create money by lending the $900 of excess reserves to another banking customer. Excess reserves are the actual reserves that exceed the legal requirement (Gwartney et al., 2018)The quantity of money in an economy and the quantity of credit for loans are inextricably intertwined. Much of the money in an economy is created by the network of banks making loans, people making deposits, and banks making more loans. The multiplier effect refers to the proportional amount of increase, or decrease, in final income that results from an injection, or withdrawal, of spending.

Response 2:) Ora

In order to determine how the monetary policy is transmitted, one must know exactly what this policy is and what it consist of. Monetary policy is the macroeconomic policy laid down by the central bank. It involves management of money supply and interest rate and is the demand side economic policy used by the government of a country to achieve macroeconomic objectives like inflation, consumption, growth and liquidity. This policy refers to the actions undertaken by a nation’s central bank to control money supply and achieve sustainable economic growth. There was a big impact of the the monetary policy that has a lot to do with the ways that goods and services market are transmitted.

The transmission of the monetary policy indicates that when Fed shifts to a more expansionary monetary policy, it usually buys additional bonds, expanding the money supply. When this happens, it provides the banks with additional reserves, which is a good thing for everyone involved. The impact of a shift in monetary policy is transmitted through interest rates, exchange rates, and asset prices. There can be a short or long run in regards to the monetary policy but that all depends on whether the AD increase and how it effects the goods and services. In the long-run, strong demand pushes up resource prices, shifting short-run aggregate supply. There has to be a proper timing of the monetary policy and depending on what timing it is will either have good of bad results. In the end, the timing should always be good because if it isn’t it can cause a recession or inflation.

Gwartney,J.D., Stroup,R.L., Sobel,R.S., & Macpherson,D.A. (2018).Economics: Private and public choice(16th ed.). Boston, MA: Cengage Learning.