What is the money supply?
The cash supply represents entire deposits in financial institutions or money outstanding and no other measures. This money is often very smooth, flows in and out of the system and are a key measure of economic health. If the money supply is too large, inflation may occur. If there is too little, economic growth may not occur. Finally, the overall goal is to provide a balance that will cause permanent growth, but not so much growth to cause inflation. Both extremes must be guarded and the economies can change very drastically, making it a very difficult balance.
Interest rates are one way to control the money of the supreness. The Federal Reserve, or the National Bank, can arbitrarily change the interest rate on the money lending to banks. If a high interest rate is charged, banks provide fewer loans. This leads to a reduction in inflation rate because there is less moneyTo make it happen, so it becomes more valuable. If interest rates are reduced, there will probably be a larger trade. Interest rates often gain great attention to the media because it has such a direct impact on the lives of many people, especially in terms of long -term loans such as mortgages. The Federal Reserve usually meets once in a quarter to consider it.
Another method has a federal reserve system for checking the offer of money is the purchase of bonds. The money from these bonds is then inserted into the system to be used by banks. These banks take over and try to lend money to make profit. This provides an engine for economic growth.
If the federal reserve system wants to reduce the instant supply, it can also sell bonds. This reduces the money for loans, because money that would normally be used for such purposes are used to purchase bonds that the federal reserve system sells. The offer of money is therefore tightened, which should be controlledInflation, but could also suffocate the economy if it was too high.
The last way in which the federal reserve system can control the offer of money is through reserves' requirements. Each bank, cooperative credit union or other depositorial institution is obliged to maintain a certain amount of its money in reserves defined as a certain percentage. The federal reserve system can change the amount required for reserves, releasing money or to further reduce its use, depending on what the economic situation may require.