Monetary Accommodation

  

Categories: Econ

Monetary accommodation is monetary policy that is…well…accommodative. Monetary policy (as a refresher) is the tinkering that a nation’s central bank does with interest rates and the money supply to affect inflation, price stability, and unemployment.

Accommodative monetary policy makes it easy to borrow. Which means low interest rates. Low interest rates encourage borrowing and investment, which theoretically spur employment and economic growth (but also inflation). Monetary accommodation is when the central bank keeps interest rates low....low, low, low, low.

In the U.S., the central bank—the Federal Reserve, i.e. “The Fed”—is the one that controls whether monetary policy is accommodative or not.

The enema of accommodative? Inflation. If it hits, we raise rates to cool things down.

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And finance Allah shmoop What is the difference between fiscal

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why Because monitoring us and Kenyans focus on different aspects

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of government to impact the economy you could say they

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uh you know believe in different magic monitor its focus

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on monetary policy Surprise surprise and Keane's Ian's focus on

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fiscal policy Okay monitoring they're all about the money Like

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you know Jerry Maguire's guy Show me the money They

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believe that by changing the money supply the government can

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impact the economy Well how does the government supply money

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Well the short answer is that the government prints the

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money Yeah that cash in your pocket it comes from

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somewhere but the actual process is more complicated The main

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actor here in the U S Is the Federal Reserve

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which is the U S central bank Every currency will

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have a central bank That's the thing that controls the

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money supply And you could say that the Fed controls

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the flow of dollars Well how does it do this

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magic key thing Well to fight recession the Fed can

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lower interest rates Cutting rates makes cheap money so that

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well people can borrow easily And then they get more

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stuff for more of it to spend on stuff you

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know to buy stuff which makes the economy go running

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around well The Fed can also lower reserve requirements for

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banks so that banks don't have to keep his much

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collateral or cash in stock And then they can loan

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out more money basically making more money available in the

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the system More liquidity in the system cheaper easier available

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money for people to borrow and or the Fed can

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buy securities like swapping cash for equities or debt All

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right so it's supplying the economy Then with cash Ola

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and the Fed does stuff like this all the time

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They're adding cash to the system and then drawing it

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out later The more dollars out there while the more

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there is to spend think about it like grocery store's

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having a whole bunch of cassava melons on a warm

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day They've got to get those melons out to the

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public and get him eaten or well they end up

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looking like this Yeah well the buzzword for your wild

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and crazy party times is expansionary As an expansionary monetary

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policy that is this set of activities is aimed at

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expanding the growth prospects of the economy by making it

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easier for buyers to buy You know like J T

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sings at Bye baby Bye baby Bye baby So that's

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on the stimulus side Growing a week or anemic economy

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But what about when the central bank wants to fight

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inflation because things have gotten too hot Well the value

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of a dollar then is plummeting and old people who

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have to hold secure safe low interest rate bonds are

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losing buying power and they have to live in their

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station wagons than down by the river What happens then

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contract the money supply puts it right on Weight Watchers

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things It raises interest rates and raises bank collateral or

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reserve minimums And it sells securities like it sells its

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own T bills cash out of the system and putting

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in its place well a bunch of paper promises to

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pay it all back someday Well the goal here is

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to take money out of the system right Higher interest

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rates and higher bank reserves make it harder and or

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more expensive for Joe Consumer and Joe Corporation to borrow

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money moves then more slowly through the economy Less cash

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is in the system so it means less of it

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to go around Yeah inflation then is knocked out or

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at least friction ized or made slower Okay that's monetary

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policy using the money supply to control the economy On

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have a long history of being excellent runners the high

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altitudes develop amazing lungs Wait wait That's something different Editor

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he given the wrong paragraph Okay well that Keen's Ian's

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Air Actually economists named after John Maynard Keen's and well

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their economic magic is all about well managing the government

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like new spending that well the government will take on

04:27

and then used to optimize whatever its vision of the

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perfect economy is Okay So what does all this mean

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While the process is generally called fiscal policy right Well

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the main player this time is not the Federal Reserve

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It's Congress and the president right It's the government getting

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directly involved in managing the economy well Politicians hoping to

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improve economic conditions have two main tools at their disposal

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Fortunately for them and for the rest of us the

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basic principle behind them are pretty simple The core thinking

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is that inflation and recession are opposites of one another

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During periods of recession there isn't enough money circulating in

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the economy It's constipated During periods of inflation there's too

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much money It's just gotten home from Indonesian food So

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the answers to these problems and well so either put

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money in or take money out of the economy As

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a result when the economy is tanking the government can

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increase its own spending or lower taxes When times are

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bad people are out of work and businesses don't have

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customers So Keens said the government should come in and

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make up the difference Big Momma Government Yeah buy stuff

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employed People put people on the dole dig holes filling

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back up Where does the money come from Taxes Eventually

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deficit spending Borrowing now on the other side of things

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to fight inflation Well then the government does the reverse

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The economy's going crazy Inflation is building bubbles or forming

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tokens Ian Think the government should play a party pooper

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here Raised taxes suck money out of the economy Meanwhile

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the government curves its own spending so it doesn't add

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to the wild party time right till the problem Government's

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rarely do of this part People hate party pooper they

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don't vote for them And members of Congress and the

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president are elected by yes the people When times are

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good politicians just want them to be better Maur Deficit

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Spending More Borrowing Well the people the Federal Reserve have

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the advantage of not being elected and the average Joe

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six pack and not really knowing what they do well

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it gives the Fed a lot more freedom to be

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party poopers Alright recap time Fiscal policy involves government spending

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in taxes while monetary policy involves the money supply in

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the U S Congress and the president run fiscal policy

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While the Federal Reserve runs monetary policy to stimulate the

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economy the Fed can lower interest rates lower bank reserve

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requirements or by security's on the open market which creates

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more cash out there in the fields It's attempt down

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the economy The Fed would reverse these like raise rates

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increase bank reserve requirements and sell securities On the physical

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side the government can pump up the economy by lowering

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taxes and increasing spending to slow things down It can

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raise taxes and lower its own spending right So yeah

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that's fiscal v monetary policy Thus smackdown Of course Well

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is the best policy But it didn't work in politics

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