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Economy

ways to decrease the amount of money that is in supply in the economy

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ways to decrease the amount of money that is in supply in the economy

Fed uses several ways to decrease the amount of money that is in supply in the economy. The system reduces the amount of money in the banking system. If the Fed wants to reduce the amount of money in quantity, it makes sure that all the bonds are sold from its accounts. It means that it will be taking payment in cash hence removing cash from the economic system. Therefore, the federal funds rate is considered to be a highly anticipated event economically. The money in supply is reduced by raising the reserve requirements of the bank. The open market operation can decrease money supply because the Fed uses bonds to in exchange with cash.

The primary tool that is used by the Fed on raising the interest rates include central banks. It offers manipulation of short term interest rates. The action is meant to slow various economic activities and control the rate of inflation in the country. The Fed also uses open market operations. The measure requires the fed to buy and sell treasury bonds in open markets. The activity directly manipulates interest rates in the economic system since the open market operation can increase or decrease money in supply. If the Fed sells bonds, the prices are pushed down hence growing interest rates. The Fed may raise interest rates by influencing the perception of the market. For instance, they can highlight that it worried about inflation due to the rapid growth of the economy. The market will react by selling bonds to Feds. The prices will decrease and push for an increase in interest rates.

The current economy may push the country to inflation. Therefore, I would recommend Feds to decrease the amount of money in supply and increase the interest rates. The main idea is to discourage the Fed from allowing low-interest rates since it results in more inflation. High-interest rates in the economy will lower the rates of inflation hence controlling the growth of the economy.

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