Money and banking Research Paper Example | Topics and Well Written Essays - 1000 words

Money and banking - Research Paper ExampleDespite the governments efforts to prevent the die of the banking system, it did not successfully restore economic growth the United States entered a deep recession in December 2007 that extended up to June 2009 (Kroszner and Melick 6). FED apply the three tools of pecuniary control open market work, reserve requirement, and discount rate to counteract the progression of the financial crisis. Figure 1 The Graph show the financial crisis between 2007 and 2007 (Source Gowland 33) The graph above shows that there was constant recession between 2007 and 2009. Financial recovery began to be experienced as from march 2009. turn out market operation The most appropriate monetary policy that was employ to counter the financial crisis of 2007-2009 constituted the increase the monetary base. Open market operation (OMO) is an instrument of monetary policy, which involves merchandising and purchasing of marketable securities (Stock and Mark 11). Th ese transactions are conducted in the open market by the central bank as an instrument of controlling the monetary system. Open market trading operations target the cash balances of held by commercial banks and other non-bank financial institutions including their tills and in relation to their lavishness reserves at the central bank. The central bank sells its holdings of the government securities to commercial banks to reduce excess reserve held by commercial banks. When the central bank anticipates fluidness deficiency, it injects additional liquidity by purchasing from the existing stock of the government securities. Decreasing the monetary base during the 2007-2009 financial crisis involved the reduced supply of credit, which was used to facilitate the adjustments in financial market in order to achieve equilibrium in money demand and supply. The national Reserve had to sell swelled quantities of securities that were necessary to achieve decreased supply of credit (Stock a nd Mark 22). Fed would also sold high-quality securities to minimize Feds credit risk and the cosmos would be informed that the expansion in the monetary base is temporary thus, the composition of Federal Reserves balance sheet and size of the monetary base would be restored to normal after financial markets and economic activity begin to normalize. The Federal Reserve used the tool of open market operations with an objective of supporting proper functioning of credit markets, reduce the pressure on long-term financial markets and make financial conditions accommodative by selling long-term securities for the Feds portfolio. Figure 2 The Open Market Operations Graph (Source Stock and Mark 21) i represents the nominal rate of interest, Dm represents money demanded and Ds represents the money supplied. The Federal Reserve varies the rates of interest to ensure maintenance of demand and supply of money with the aim of preventing financial crises. give the axe Rate The second tool of monetary control that Fed used during the financial crisis is the discount rate. Under this policy, the bank can borrow reserves from the Federal Reserve at their discount windows (Stock and Mark 18). These rates are set by the Boards of Directors of the Reserve Banks, but the rates must be subjected to determination and check into by the Federal Reserve Board. The Federal Rese