Week 6 Xeco 212 Money Train Multimedia Activity

In: Business and Management

Submitted By Korri016
Words 564
Pages 3
Money Train Multimedia Activity

XECO/212

June 10, 2013

Nicholas Kuzmich

Reserve Requirements

1. To increase growth, the Federal Reserve should lower reserve requirements. When reserve requirements are lowered, it means that banks are required to keep fewer funds in their reserves. As such, they will have more funds to loan, this will increase money supply. When supply of money increases, there will be a decrease in interest rates. When interest rate falls, investors and consumers will be more willing and able to borrow funds to invest and consume since it is now cheaper to borrow funds. When consumption and investments increase, it will increase aggregate demand and thus bring about economic growth. Economic growth is important to maintain or improve standard of living. In addition, economic growth helps to close recessionary gaps and thus reduces unemployment rates and increase level of income. On the other hand, when reserve requirements are increased, supply of money will fall. This will result in an increase in interest rates which will contribute to a decline in economic growth.

Discount Rates

2. To slow down an economy, the Federal Reserve should increase discount rate. This makes it more expensive to borrow funds. As such, banks will have fewer funds available. When this happens, supply of money will decrease and this will result in an increase in interest rates. With the increase in interest rates, consumers and investors will find it more expensive to borrow funds for investments and consumption. Hence, this will result in a fall in both activities and this will cause a decrease in aggregate demand to slow down economic growth. It is important to slow down economic growth so that aggregate supply and aggregate demand can be…...

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