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Macroeconomic Impact on Business Operations
The purpose of this study is to show the tools used by the Federal Reserve to control the money supply, its influences, and the effect on macroeconomic factors. This analysis will discuss the monetary policy and its effect on macroeconomic factors such as GDP, unemployment, inflation, and interest rates, explaining how to create money and which combinations of monetary policy help the economy to achieve a balance between economic growth, low inflation and a reasonable rate of unemployment.
To start understanding how to create money, it is better to return in time and see how the market began.
The traders in the 16th century started to use gold when making transaction. Soon, they realized that it was unsafe and inconvenient to carry it, have it checked for purity and weighted in all transactions. Therefore, they arranged with the goldsmiths to have the gold deposited with them for a small portion of the gold-deposited (fee) as payment for storage. These goldsmiths, in opposite, started giving them paper receipts, there were used as forms of payment for future transactions, involving goods and services. The redemption of those receipts was rarely done and the goldsmiths realized that the amount of gold deposited was much more than it was withdrawn. They then started to issue paper receipts for the excess of gold in stock and put those papers in circulation by making interest-earning loans to merchants, producers and consumers, since those were accepted everywhere in exchange at the marketplace, creating the start of “Fractional Reserve Banking.”
The conclusion is that lending is one form of create money. The banks use their reserves to lend to consum ...