Easy Monetary Policy - Explained
What is Monetary Easing?
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What is Easy Money?
Easy money is an economic term used to describe money supply. It is also known as monetary easing and expansionary monetary policy.
What is Monetary Easing?
Monetary easing increases the supply of money in the economy by making access to capital easier or less costly.
Who Regulates the Money Supply?
The money supply concerns the amount of currency issued into society. The Central Bank of every country is tasked to regulate money supply in the country. In the United States, the money supply in regulated by the Federal Reserve Bank.
How Does the Central Bank Regulate the Money Supply?
The central bank uses different tools to inject or contract the money supply. This primarily happens in two manners:
- Through the Federal Open Market, and
- the Federal Reserve Bank purchases treasury securities from the US Government.
What is the Federal Open Market?
The federal open market is the committee within the Federal Reserve bank that sets interests rates on money lent to banks to meet capital reserve requirements. This is known as the overnight interest rate, as these loans are technically 24-hour loans. In reality, these are rolling loans that are renewed daily.
What is the Effect of Lowering Interest Rates?
In summary, lowering the overnight interest rate at which banks (lending institutions) borrow money gives these borrowing banks more money to lend. If money is easier to acquire by loan, individual consumers are more able to acquire loans to purchase things, such as houses, cars, etc. It also makes it easier to expand businesses operations by purchasing additional equipment, upgrading facilities, and hiring more employees.
This increases the supply side of the economic production-consumption equation. Also, the money spent on equipment, facilities, and employees flows into the economy (think about the businesses selling the equipment and the employees with more money to spend) and creates additional demand. The total production and consumption increases.
What is the Effect of the Federal Reserve Bank Purchasing Securities from the Government?
The government is partially funded through the sale of securities. This money funds government operations for the public. Through government spending (spending programs, grants, employee salaries, etc.), money will be injected into economy and vice versa.
Why do Monetary Easing?
The purpose of monetary easing is to stimulate economic growth and to push down the unemployment rate in the country. The economic stimulus is caused by the effect of introducing more money into the system.
Example of Monetary Easing
For example, when the Federal Reserve Bank wants to increase money supply in the country, it lowers the overnight interest rate (the rate charged to banks to borrow money). As such, borrowing for banks becomes less costly. This, in turn, makes money more accessible and less costly for borrowers from the lender banks.
Inflation and Easy Money
Central banks are reluctant to maintain an easy money policy (low overnight interest rate) for long periods of time, as it may create inflation in the country.
Inflation causes the purchasing power of money to diminish (meaning that prices for goods and services rises). As such, the Federal Reserve Bank may adopt monetary policy according to the needs of economy.
For instance, if there is inflation and the government wants to control inflation then the Federal Reserve Bank may adopt contractionary monetary policy. If there is need for investment and the unemployment rate is rising, the bank may adopt expansionary monetary policy to foster economic activities in the country.
- Legal Tender
- Gresham's Law
- Functions of Money
- Gold Exchange Standard
- Bretton Woods System
- Fiat Money
- Monetary Base
- How Do Banks Create Money?
- Bank Balance Sheet
- Velocity of Money
- Multiplier Effect
- McCallum Rule
- Neutrality of Money
- Real Bills Theory
- Banking System?
- Central Bank
- Federal Reserve System
- Federal Open Market Committee (FOMC)
- Fed Balance Sheet
- Term Auction Facility
- Taylor Rule
- How is the Federal Reserve Bank Organized?
- What is Bank Regulation?
- CAMELS Rating
- Bank Supervision
- Bank Runs
- What is Deposit Insurance?
- Federal Deposit Insurance Corporation
- Lender of Last Resort
- Central Banks Carry Out Monetary Policy
- Bank Reserve
- Discount Rate
- Federal Funds Rate
- Monetary Policy
- Contractionary and Expansionary Monetary Policy
- Easy Monetary Policy
- Accommodative Monetary Policy
- Dove & Hawk (Monetary Policy) - Explained
- Tight Monetary Policy - Explained
- Stabilization Policy
- Pushing on a String
- The Effect of Monetary Policy on Interest Rates
- Federal Funds Rate
- Gibson Paradox
- Vasicek Interest Rate Model
- Equation of Exchange (Economics)
- The Effect of Monetary Policy on Aggregate Demand
- Reserve Currency
- What are Excess Reserves?
- Unpredictable Movements of Velocity
- Central Banks - Unemployment and Inflation
- Fisher Effect
- Asset Bubbles and Leverage Cycles
- Quantity Theory of Money
- European Capital Market Institute