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This in turn expands banks reserves, which in turn lowers the federal fund rates. This makes it easier for banks to initialize ore loans and loan more money, which once again, in turn, helps the economy grow faster.
On the other hand, if the economy is growing too fast, which would lead to inflation, the Feds would sell securities...
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This has the opposite effect in that it lowers banks reserves and puts clamps on the amount of money loaned and the federal funds rates increase. âGenerally, this reduces the money supply and protects against inflation.â (Encarta.msn.com, 2003).
Monetary policy rests on the relationship between the rates of interest in an economy, that is the price at which money can be borrowed, and the total supply of money...
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