Likewise this cycle of purchases can be broken with a tightening of the money supply, having a negative impact on the GDP.
Unemployment is affected as well. As money supply is loosened, businesses are encouraged to expand. Capital is more readily available to finance expansion, and a growing GDP further encourages this expansion by providing more money in the market to purchase the new goods or services that the expansion creates. Some of this investment will generate new jobs, lowering unemployment. Conversely, a tightening of the money supply will discourage the creation of new jobs.
2a) Money is created in three ways. First, open-market operations create money. When the Fed buys securities from the banks, it does not pay for them. Instead, it creates a credit on the balance sheet. This credit then enters the economy when the bank subsequently lends it. Open market operations are conducted with the objective...
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