Credit Counterparts of Broad Money Essay Example | Topics and Well Written Essays - 500 words

Credit Counterparts of Broad Money - Essay Example This paper illustrates that the effect of a government loan to another government is a reduction in the money supply in the economy. Based on the IS-LM model, it is apparent that reducing the supply of money shifts the LM curve to the right thus moving the equilibrium interest rate upwards and the level of national output downwards. On the macroeconomic level, the government can use this item of the Broad money counterparts as a macroeconomic policy to curb inflation or unsustainable increases in national output. The policy can be used as a contractionary fiscal to reduce excess liquidity in the economy and control inflation. Excess liquidity refers to a situation where the money being held by the public is in excess inducing excess spending and hence excess demand. The excess demand to supply can cause an unhealthy price increase. Foreign reserves are adjusted using the surpluses of trade that is a stimulus to increase exports thus increasing the foreign reserves while an increase i n imports decreases the foreign reserves. Changes in foreign prices in countries largely dependent on international trade have a significant effect on the money supply, inflation, and national output. The increase in the prices of imports will result in inflationary pressures in the economy. On the contrary, an increase in export prices will cause an increase in the profitability of the export goods and hence a shift of resources in the production of export goods. The change in import and export prices affects a countries balance of payment situation. The government can control national output and inflation through fiscal policies regulating imports and exports. When the balance of payment has been offset by over importation, the government can curb the inflationary effects by introducing higher tariffs that will adjust imports to a sustainable level.