Economics

Economics

1. The kind of Monetary Policy exercised under the recessionary gap and its Policy tools

During a recession, the central bank usually utilizes expansionary monetary policy (easy) to increase money in circulation. It is done by lowering the reserve rate, buying securities, and decreasing the discount rate (Seeruttun 4).

Example:

COVID-19 Pandemic

Economies were severely affected by the shortage of economic activity in 2020 when the Coronavirus swept the planet, and most governments went into lockdown. The Fed's quantitative easing program was intended to help the economy (Echarte Fernández et al. 4).

1. Explanation Of Money Multiplier, Formula, and The Creation Process

In fiscal economics, the expression money multiplier refers to the phenomenon of producing money in the economy via credit creation, depending on the fractional reserve banking system (Von der Becke et al. 5). The money multiplier effect is shown by banks when they accept deposits and then distribute the proceeds as loans to inject liquidity into the economy. Cash Reserve Ratio (CRR) or Required Reserve Ratio (RRR) is the amount banking institutions keep for clients to withdraw, referred to as reserve ratio, cash reserve ratio, or required reserve ratio.

The mathematical representation of the money multiplier formula is as follows (Li, Boyao, et al. 198):

Money multiplicator equals 1/r

Where r = CRR or RRR

This implies that if the reserve ratio increases, the money multiplier will decrease, and banks will be required to hold additional reserves. Consequently, they will be unable to lend further funds to people and companies. On the same note, a lower reserve ratio results in a greater money multiplier, which permits a smaller quantity of money to be retained as a reserve and more chances for public lending.

The Creation Process

For instance, the Fed decided to deposit $100 in Bank 1 after printing it. For example, Bank 1 puts aside 10% of the $100 to be held as necessary reserves. The remaining 90%, or $90, is deemed surplus. When Customer A deposits into his account at Bank 2, Bank 1 may lend him the $90. We may now add Customer A's $90 to the initial $100 in the system. Bank 2 keeps 10% in reserve and loans the remainder to other institutions. A similar pattern repeats until no more surplus funds can be generated.

1. Comparison of Discount rate, Deposit rate, Federal fund rate, and Prime rate

The discount rate: The Federal Reserve’s interest rate for banking institutions using the discount window to borrow cash (Drechsler et al. 1820). For 24-hour loans, banks often negotiate a higher interest rate than what is provided by the federal funds rate.

The Federal fund rates: This is the interest rate on interbank loans made overnight. Put differently, banks with extra reserves advance loans to other banking institutions that lack sufficient reserves to fulfill their reserve demand. This kind of loan is usually given overnight (24 hours) (Drechsler et al. 1829). Credit circumstances are quickly reflected in federal rate funds changes. Variations in the federal funds rate immediately reflect changes in credit conditions.

The Prime rate: Banks charge this interest rate to their most credit-worthy corporate customers. Customers with worse credit scores would be charged a higher interest rate than the prime rate. Banks use the prime rate as the starting point for determining their short-term interest rates. Auto and credit loans frequently have variable interest rates based on the prime rate. Variable interest rates move in tandem with variations in the prime interest rate. An issuer's prime rate reflects banks’ consensus or average charge since each may establish its own. The prime rate and federal funds rate is interest rates established by the market (Heim 510). In other words, their credit markets’ demand and supply dictate their interest rates.

The deposit rate is the interest rate on cash deposits by commercial banks and financial organizations (Qayimova and Aminova 261). Accounts for deposits consist of saving accounts, certificates of deposit (CDs), and other investment accounts.

For instance, money market and savings accounts often pay a deposit interest rate on cash deposits. Banks and other financial organizations also pay a deposit rate on funds in saving accounts and other accounts. The interest rate on a deposit may be set for a specific time with a minimum deposit amount, or it can be variable.

1. The relationship between Bond price and Interest rate.

The correlation between interest ra


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