Question

What happened when the Federal reserve limited the money supply?

Answer 1

Hint: The Federal Reserve System of the United States is in charge of the country's monetary policy and financial institutions. In collaboration with the New York Fed, the system is made up of 12 regional reserve member banks, each of which focuses on a specific geographical zone.

Complete answer:
The Federal Reserve has five main responsibilities: conducting monetary policy, regulating banking institutions, monitoring and protecting consumer credit rights, maintaining financial system stability, and providing financial services to the US government.

When the Federal reserve limited the money supply –
- Deflation is caused by a reduction in the money supply.
- Business growth was stifled due to a lack of currency.
- The US dollar's value remained high due to the slow release of currency.
- With the tight-fisted strategy, the value of stocks gradually recovered.
- Rather than investing in the stock market, more capital went into industry.
- The basic premise of monetary theory is that increasing the money supply causes inflation, while limiting the latter does not. After becoming Chairman of the Federal Reserve in 1979, Paul Volcker used this theory from 1979 to 1987. When it comes to controlling the money supply to thwart inflation, Milton Friedman has been a major influence.
- A reduction in the money supply is accompanied by a corresponding decrease in nominal production, also known as GDP (GDP). Furthermore, a reduction in the money supply would result in a reduction in consumer spending. The aggregate demand curve would change to the left as a result of this decrease.

Note: Today, the federal government uses its resources to help stabilize the economy by controlling the supply of capital. When the economy is in a recession, the Fed expands the money supply to stimulate growth. When inflation is a possibility, on the other hand, the Fed eliminates the danger by reducing the supply.

The Fed regulates the amount of money in circulation by increasing or decreasing the monetary base. The monetary base is related to the size of the Federal Reserve's balance sheet; precisely, it is currency in circulation plus depository institution account balances with the Fed.