6a - benefit of the lower interest. Banks have the ability...

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Monetary policy is used in order to reduce inflation and is therefore an important tool. By increasing interest rates, the cost of borrowing gets more expensive. This reduces investment spending while at the same time induces saving. The increase in the interest rates also lowers the value of bonds. Additionally, the increase of the interest rate will reduce aggregate demand. This reduction shifts the equilibrium to the left therefore reducing inflation. So I don’t agree that using monetary policy for controlling inflation is a bad thing. I believe the Fed did this because they felt the need to expand the economy as the U.S. was heading into recessionary times. They attempted to expand the money supply by making loans less expensive. I believe the impact of not doing the interest rate reductions would have left us with a worse economy. Unfortunately the reduction kept happening and while it was making the banks richer, the rest of the economy was not enjoying the
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Unformatted text preview: benefit of the lower interest. Banks have the ability to hold reserves either at their vault or at the Fed. Money in the vault doesn’t pay interest so why should the Fed pay interest on it. The revenue loss that the banks have is due to the requirement to hold a reserve in order to make sure the banks have enough money to do their daily business. Money is moved between banks within the reserves in order to clear deposits and withdrawals so therefore they are providing a service and shouldn’t pay interest on the money held. Ultimately the interest paid would have to come from tax money since the Fed doesn’t necessarily make money by holding on to it. The only pro I believe is for the banks because they will have more money on their balance sheet and can therefore loan more money out in order to gain more profits and expand the money supply further....
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This note was uploaded on 09/07/2011 for the course ECON ECO 201 taught by Professor Unknown during the Spring '09 term at New York Institute of Technology-Westbury.

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