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Currency and demand deposits now constitute only about one-fourth of the money supply, the type of money now commonly considered most relevant for monetary policy. The other components mainly time and savings deposits and balances in money market mutual funds and in money market deposit accounts require no reserves to be held in the Federal Reserve. If the amount of those other kinds of money increases relative to currency and checkable deposits, the total money supply can increase without any increase in monetary base. The ability of the Federal Reserve to control size of the money supply does not imply that making the money supply move along some predetermined path has been the exclusive or primary goal of monetary policy. The Fed may use its powers with some other goal in view; such as to manage interest rates or exchange rates. But in any case its policies, whatever their goal, will affect the supply of money.
Whether Federal Reserve policy should be aimed at a predetermined path of the money supply or at some other or some combination of objectives is a continuing subject of disagreement among economists. Monetary policy is majors instrument the government uses in an effort to stabilize the economy. The influence of monetary policy control of the money supplies derived from the fact that at any time people want to hold a certain amount of money in relation to their income. If the money supply exceeds what people want to hold, they will use it to increase their purchases or investments, which will rise total output or the price level or both. Conversely, if the money supply is less than they want to hold, their response will depress output or the price level. The problem with managing the money supply so as to stabilize the economy lies in two conditions.
First, an uncertain amount of time will elapse before a decision to change the money supply will result in an actual change and the effect is felt in the economy. Second, how much money people will want to hold at a time in the future is not predictable within a certain margin of error. It is possible that a decision to change the money supply that seems entirely appropriate to the state of the economy at the time may be quite inappropriate when the decision takes effect. If, for example, the economy is depressed, an increase takes effect, people may have reduced the amount of money they want to hold perhaps because they have become more optimistic about future conditions so that the increase in the money supply turns out to be unexpectedly inflationary. An important ongoing support for the economic activity is provided by an accommodative stance of monetary policy with still-rooms underlying growth in productivity. But incoming economic data have tended to confirm that greater uncertainly is currently inhibiting spending, production, and employment.
Inflation and its expectations still remain well contained. As the economy works its way through this position, the Committee believes that todays additional monetary easing should prove helpful. This action underlines that, against the background of the long-run goals of price stability and sustainable economic growth and of the information currently available, the risks are balanced with respect to the prospects for the both goals in the future. Fiscal policy is another tool of government intervention for stabilization in economy of the country.
Fiscal policy is used as a tool by all levels of government. The term fiscal policy refers to the expenditure a government undertakes to provide goods and services and to the way in which the government finances expenditures. In 2002 the State Governments faced a combined budget gap of more than $ 40 billion, as a result of an overspending budget in the 1990 s. More tough choices for the governors are expected to arise in 2003. Its important that governors do not make mistake of raising taxes in order to balance budgets, as many of them did in the economic slowdown of the early 1990 s.
As many economists, I think we should reduce and cut tax rates, this way we can return to the fiscal and economic health.
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Research essay sample on Amount Of Money Money Supply
