Question

Suppose a new and more liberal Congress and administration are elected. Their first order of business is to take away the independence of the Federal Reserve System and to force the Fed to greatly expand the money supply. What effect will this have on your organization and/or industry? What about interest rates and the general consumer? Would you support or oppose such an expansion? Why?

Answer 1

Answer:

Check the answer below.

Explanation:

The Fed would increase the money supply by ordering trading desk at the Fed to purchase securities from the govt. securities market dealers, these dealers would sell the securities to the Fed traders for money, this money goes into the dealers deposits at different depository institutions (banks) therefore the money supply in form of deposits shall increase in these depository institutions.

The result is large money deposits at the depository institutions as a result of which these depository institutions would reduce the interest rate at which to lend these excess money ,as the demand for the loans is lesser as compared to supply(large money in deposits)the depository institutions would decrease the interest rates to adjust the equilibrium between the demand and supply of the loan so that the demand matches the supply and that adequate loans are provided as per the large money deposits at these institutions.

The general consumer would now have more free access to the money as he can borrow money from the banks at a cheaper rate so that the more money is available to him for spending.

The organisation or industry would have easy access to loans so that now greater finance is available at a cheaper rate, the industry borrowing would increase on account of less interest rates and with these larger borrowings more profitable investments opportunities can be executed which would ultimately mean that the growth of the industry would increase.

It depends on the state of the economy whether there is a recession or a stable economy or a growth phase, it also depends on whether Fed would want to fuel the growth engine or want to cool the economy to a stable level. If the conditions are recessionary then I would definitely support the expansion because these action of expanding money supply is necessary to fuel growth if not long term then shorter term at least, larger money supply would increase spending power of consumers who would increase the demand so that the industry output shall increase and bring the economy to growth phase again.

If the conditions are such that Fed feels like the economy is overheated or that there is excessive growth than demanded then I would oppose such an expansion in fact it would be wise to curb the money supply and halt the expansion to a stable level. If the conditions are normal then it’s up to Fed to decide when to increase and decrease the money supply as per there growth outlook I would be unbiased to either expansion or non-expansion of money supply.