Monetary Policy (Essay Sample)

Student's Name Professor's Name Course Number Date What Kinds of Monetary Policy (Easy or Tight) Should Be Exercised Under The Recessionary Gap? Give Examples of Policy Tools In Terms of RRR (Required Reserve Ratio), DR (Discount Rate), and OMP (Open Market Policy). The central bank uses an expansive monetary policy when the recession threatens a country. The approach entails increasing money supply, increasing lending while keeping interest rates low, and shifting aggregate demand to the right ("Using Fiscal Policy to Fight Recession, Unemployment, and Inflation – Principles of Economics 2e"). The monetary expansion policy can either be fiscal expansion policy, stimulation monetary policy, or even both. Expansion budgetary policy involves the government increasing its expenditure or reducing taxes (Mankiw pp 738-746). On the other hand, stimulating monetary policy results in high consumption and investments through low-interest rates and reduced borrowing costs. Explain the" MONEY MULTIPLIER" Of Money Creation, Including the Formula and the Process The money multiplier in the banking system is simply the ratio of deposits to required reserves. The money multiplier is the number of times the money in the economy will be multiplied. The money multiplier process shows how an increment in the monetary aggregate increases the money supply by a given factor (Pettinger).The formula is as follows: Money Multiplier= Change in total moneyChange in monetary baseThe simplified formula is as below: Money Multiplier= 1Reserved Ratio The equation means if the reserve requirement is 20%, then the money multiplier will equal 1/0.2 or 5. Compare Discount Rate, Federal Fund Rate, Prime(Lending) Rate, and Deposit Rate. The interest rate within 24 hours and on interbank loans is the federal funds rate. At the same time, the prime rate is the interest rate charged by a bank to their most valuable loyal customers, those with the best credit ratings. The discount rate can refer to the interest rate on short-term loans or the rate used to discount future cash flows in discounted cash flow (DCF) analysis, set by set by the Federal Reserve. On the other hand, the deposit rate is the interest rate paid by financial institutions on account holders' cash deposits. Discuss the Relationship Between Bond Price and Interest Rate. Bonds and interest rates have an inversely proportional relationship, which means that the interest income provided by bonds is the opposite of the interest rate. When interest rates rise, new bonds are issued at a high rate, providing more income ("Inverse Relationship Between Interest Rates and Bond Prices"). Recent bonds have a lower yield when interest rates fall and are less appealing than older bonds. Nonetheless, fixed-bond doesn't adjust when the interest rate change. If RRR(Required Reserve Ratio) is Larger, is the Money Multiplier Bigger or Smaller? Why? Explain Based On The Formula. The money multiplier is small when the reserve ratio is high. When the required reserve ratio is more extensive, it means lesser excess reserves, which translate to fewer bank loans and, therefore, the l...