Answer 1: The factors that influence the Fed's balance sheet are its assets and liabilities. In assets Fed hold securities like U.S Treasury which is controlled by open market operations. Then the foreign exchange reserves issued by the foreign governments. The SDR(special drawing rights) and gold are official asset, other Federal Reserve asset and the discount loan. In liabilities, the currency in circulation, the reserves i.e. the accounts with commercial bank , government accounts and other liabilities which mainly consist of reserve repo rate. The asset that has increased Fed balance are purchase of treasury and mortgage bonds(Kearns).
Answer 2 : High powered money or the monetary base consist of currency i.e. notes and coins and the banks' deposit at the Fed. The fed has direct control over the monetary base. The part of the currency that is held by the public is the supply of money. The supply of money and the monetary base are linked by the money multiplier. The money multiplier is the ratio of the stock of money to the stock of monetary base. The currency in the banks' vault and the banks deposit at the Fed are used as reserves backing individual and business deposits at bank. The Fed's control over the monetary base is the main route through which it determines the supply of money. The Fed uses some instruments to control the supply of money are open market operation, required reserve ratio and discount rate.
Answer 3. Money creation is the process of increase in money supply within a country. This is generally controlled by the Fed in U.S.. But as money is now circulated in the country not only in the form of cash but also in electronic form. This electronic form is controlled by the commercial banks. So banking system has more control over money creation than Fed(McLeay et al,2).
Answer 4: The quantity theory of money which shows that MV= PY where M is the supply of money , V= velocity of circulation, P= average price level and Y= real output states that as amount of money and the price of goods and services are related positively and as amount of money increase the price level rise leading to rise in inflation. Velocity of circulation = Nominal GDP divided by money supply. During recessions the velocity became unstable and the link that was shown on the equation between money supply an nominal GDP( GDP at market prices) failed leading to the failure of monetarism(Jahan et al,5).
Answer 5: When Fed lowers the interest rate it makes borrowing easier for the consumer and the business which increases investment . On the other hand, when Fed increases the interest rate then the borrowing becomes tough and reduces investment. So increasing or decreasing interest rate is chain reaction. Fed tries to increase money supply by lowering the interest rate and vice versa happens when there is too much money in the economy.
Answer 6: The theory of Minsky is known as "financial instability hypothesis". According to him lending passes through three different stages the Hedge, the Speculative and the Ponzi. In the first stage just after the crisis the banks and the borrowers become cautious. They loans are given in a modest way to those borrowers who can pay the interest and the principal. In the second stage the confidence rises and banks give loans to borrowers who can pay the interest. Then in the last stage the bank provide loan to the borrowers who can neither pay the interest and the principal and it is believed that the asset prices will go up. But the asset prices fall which increase the debt in the system that are not paid off. Deflation is bad because when prices fall profits fall which worsen the situation the debtors. Then recession turns into depression(Wolfson, 2).
Answer 7: The Philips curve showed the inverse relationship between the tare of unemployment and the rate of increase in wage rate. The Philips curve became a cornerstone of many macroeconomic policy analysis. Friedman presented a country Philips curve where employers and the wage earners bargain over wages and both sides are willing to adjust the level of nominal wage for any inflation over the contract period i.e. wage rise or fall according to the demand of labor. The original Philips curve was applicable for short term. The long term theory is known as long run Philips curve or the non accelerating rate of unemployment (NAIRU)( The Long-Run Phillips Curve).
Answer 8: "Helicopter money" is an alternative to quantitative easing and is an expansionary fiscal policy i.e. to raise the public spending or tax. So if public spending increase it will increase the GDP which will increase consumer spending causing a rise in inflation(Cohen-Setton,1).
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Answer 9: Alan Greenspan focused more on controlling prices and regulating inflation rather than to achieve full employment. He also explained that the role of gold in global monetary system can predict the future financial crisis(Gold, Economic Theory and Reality).
Works Cited
Kearns, Jeff. Fed's $4 Trillion Holdings to Boost Growth Beyond End of QE: Bloomberg. (2014): 24th October. Web. 7 Apr.2016.
McLeay Michael, Radia Amar and Thomas Ryland. Monetary Creation in Modern Economy. Quarterly Bulletin (2014) Web. 7 Apr.2016
The Long-Run Phillips Curve. Boundless : Concept Version 5(2014) Web. 7 Apr.2016.
Wolfson, Martin H. Minsky's Theory of Financial Crisis in Global Context. Journal Of Economic Issues (2002): Volume XXXVI. Web. 7 Apr.2016
Jahan, Sarwat and Papageorgiou, Chris.What is Monetarism?. International Monetary Fund (2014): Volume 51.Web. 7 Apr.2016
Cohen-Setton, Jeremie ." Permanent QE and helicopter money"(2015).5th January.Web. 7 Apr.2016.
"Gold, Economic Theory and Reality: A Conversation With Alan Greenspan". Streetwise Reports. (2014).Web. 7 Apr.2016.
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