Question

1. Please reflect on how the money multiplier concept can be an important tool of both expansionary as well as contractionary monetary policy for any central bank such as the U.S. Federal Reserve Bank?
2. The Federal Reserve Bank lowered the required reserve ratio to 0% across the board in 2020. Explain the potential reasoning behind this lowering to 0% and its intended effect on the economy.

Answer 1

The money multiplier concept uses  three key actions that is done by the Fed so as they can widen the economy and these includes the use of a decreased discount rate, the buying government securities, and also by lowering reserve ratio.

What is expansionary and contractionary monetary policy?

A monetary policy that is known to be that which helps to lowers interest rates and influence borrowing is called an expansionary monetary policy or one can say a loose monetary policy.

Also, a monetary policy that tends to bring up interest rates and lowers borrowing in any economy is known to be a contractionary monetary policy and also called tight monetary policy.

Thee potential reasoning behind this lowering to 0% and its intended effect on the economy?

Note that Expansionary monetary policy aims to increases the money supply while  Contractionary monetary policy aims lower the money supply.

Therefore, the use of lower rates of economic growth is one that tens to give more likelihood or chance for the shift to renewable energy. It also leads to more saving, and investing.

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