Inflation is skyrocketing, and prices are out of control. What are banks most likely to ask the Federal Reserve to do with regards to government bonds and reserve requirements? Be sure to explain why.

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anonymous · Answer

@razor99 hey sorry to bother you again but could you help me with this question

razor99 · Answer

Thats okay like i said i love to help in econ

anonymous · Answer

:)

razor99 · Answer

Hey i got some information via internet

anonymous · Answer

ok what is it

razor99 · Answer

since i dont have my notes at the moment

anonymous · Answer

ok thats fine

razor99 · Answer

If inflation is running high, the Fed will raise interest rates, sell bonds on the open market, and raise the reserve ratio (if it comes to that. It rarelyever does). Raising interest rates makes money "more rare". Selling bonds decreases the reserves of banks, which decreases their lending capabilities (again, making money more rare). The reserve ration is the "nuclear option" of monetary policy. It specifically changes how much money banks have to keep on hand. If it changes, the money multiplier changes. In other words, the Fed would raise the reserve ratio in order to fight inflation. A second opinion: The Federal Reserve is in charge of the money supply. They can increase it or decrease it by three methods. Each bank maybe required to adjust their Reserves on hand.Discount Rate maybe adjusted, the rate the fed pays banks for loans banks have that they wish to sell to the Fed.

razor99 · Answer

The information source is from wikinaswers

razor99 · Answer

*wikianswers

anonymous · Answer

ok thank you so much your such a lifesaver

razor99 · Answer

Nope lol not me thank wikianswer

anonymous · Answer

That is probably the answer that the professor wants. It's easy to grade. But the reality is that it is a useless policy prescription because it doesn't take into account context. What I mean is that first, it is unlikely that banks would ask for this because it would hurt their profits if reserve requirements were raised, and second, you have to take into account the politics of the situation. I think you would get an A+ on the answer if you gave the standard answer and then qualified it by referring to a little history to show how difficult it is to get these textbook solutions passed. Take a look at the problems Volker had in 1979 in the US when inflation was 13%. See http://www.bloomberg.com/news/2012-08-20/how-volcker-launched-his-attack-on-inflation.html . Of course, it's easier to give the straight answer but economics can come alive if you look at the context and politics associated with it.