Financial Institutions and Markets Essay Example | Topics and Well Written Essays - 2000 words

Financial Institutions and Markets - Essay ExampleA pecuniary policy employed by a country can either be an expansionary monetary policy or contractionary monetary policy. Expansionary monetary policy encourages in increasing the money supply in the economy of a country at a faster rate than normal and in case of contractionary monetary policy, the money supply increases at slower rate or even fall behind in the economy. Expansionary monetary policy is a lottimes employed to prevent unemployment during recession. It happens because of please rate going lower which therefore attracts credit facility to be available easily for the business concerns to help themselves expand. In the United States, expansionary monetary policy is implemented through and through the combination of three things. They are a) Using Open Market Operations, by purchasing securities in the circularise market. b) Federal Discount Rate is lowered. c) Reserve Requirements are also lowered. Now, all these thre e steps digest a direct impact on the interest rates, including owe rates. This lasts to increase in borrowing of mortgage loans, as well as increase in rates of capital investments by business concerns. close countries follow an expansionary monetary policy to ensure higher economic growth and go on lessen the interest rates. It helps in growth of employment opportunities but at the same time has its limitations too. This can exactly have a short term stamp on the economy. In the commodious run, it will lead to higher inflation rate and would also affect the economy in an adverse way (Mishkin, 2007, p.39). Thus, effect on long term mortgage rates are less predictable and the effect is on a lower proportion as compared to the extent of expansionary economic measures taken by a country. This happens generally due to two reasons. Firstly, real factors like market demand influences the long term mortgage interest rates more than the monetary factors. Secondly, the effect or im pact of monetary factors operates mainly on the judge future long term mortgage rates (Gwartney, et. al. 2008, p.301). Although the expansionary economic measures reduce the short term mortgage interest rates, it may lead to a rise in interest rates in long term. This unpredictability problem creates a surmounting problem in creating a balance between the mortgage rates and expansionary economic measures followed by a country. Expansionary Monetary Policy Expansionary monetary policies are used by countries to help stimulate the economic growth of the country. It leads to increase in supply of money in the country. It usually leads to laborious of interest rates in the country. This in turn reduces the borrowing cost and also reduces the return on savings. This helps in increasing the aggregate demand of goods and services in the economy. People are more attracted towards drop in housing by taking loans at lower interest rates. These types of expansionary monetary policies are of ten employed in countries to counter the recessionary gap. It helps in reducing or preventing unemployment