Likewise this cycle of purchases can be broken with a tightening of the money supply, having a negative impact on the GDP.
Unemployment is affected as well. As money supply is loosened, businesses are encouraged to expand. Capital is more readily available to finance expansion, and a growing GDP further encourages this expansion by providing more money in the market to purchase the new goods or services that the expansion creates. Some of this investment will generate new jobs, lowering unemployment. Conversely, a tightening of the money supply will discourage the creation of new jobs.
2a) Money is created in three ways. First, open-market operations create money. When the Fed buys securities from the banks, it does not pay for them. Instead, it creates a credit on the balance sheet. This credit then enters the economy when the bank subsequently lends it. Open market operations are conducted with the objective of influencing the federal funds rate.
Essentially, the Federal Reserve either purchases or sells U.S. government securities. These transactions are conducted on the open market in a competitive environment, hence the term "open-market operations."
These securities can be issued by the U.S. Treasury, Federal agencies and government-sponsored enterprises.
A second way the Fed can create money is simply by printing more. This tool is not commonly used to influence monetary policy, as the amount of physical money is only a small proportion of total money supply. Printed money supply is generally based more on the demand for the physical version of money than the need to create more money in the economy. Based on this demand, the Fed either issues currency to the banks or takes in currency from the banks.
2b) One of the Fed's main roles is to achieve price stability. This is because inflation reduces the value of money, which in turn has a negative impact on the economy. The need to keep inflation in check must be balanced against the need to encourage economic growth, which in turn provides a reasonable level of unemployment. The goal of the Fed is to strike a balance between these factors. If the money supply is loosened too much, inflation will rise and the value of money will decrease....
Macroeconomic Impact on Business Operations Monetary and fiscal tools are used by the government to control economic conditions in the country. Monetary policy usually targets money supply in the market in order to control inflation. In some countries such as Russia and Brazil, governments may often force the mints to print extra currency to meet various expenses. This results in higher flow of money in the market which is unsubstantiated by
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