Expansionary and Contractionary Monetary Policy? Term Paper

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How do open market operations work through the fractional reserve banking system to impact the money supply and interest rates?

The fractional reserve banking system ensures that rampant speculation will not occur, as the money supply must be backed by a certain percentage of reserves held by banks, determined by the discount rate. This is intended to prevent the runs on banks as occurred after the 1928 'Great Crash' of the stock market.

What potential problems arise from government guarantees?

Government guarantees can encourage foolish or wasteful economic practices by providing a 'safety net' for foolish economic practices.

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Why does the CPI overstate the inflation rate, and why this is a problem?

The Consumer Price Index only keeps track of some goods from month to month bought by consumers, considered basic sustenance items that may be more subject to inflation than other goods. But when it is reported that the CPI is going up, people may be more likely to cut back their spending, fearing prices will continue to rise, or investors may urge the FED to raise interest rates to curtail inflation, even when it is not really a problem.

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