Posted in Finance, Accounting and Economics Terms, Total Reads: 101
Definition: FED Pass
FED Pass is a money market instrument used by the Federal Reserve. This money market instrument tends to influence/ change the money supply in the economy. To increase the supply of money in the economy the Federal Reserve increases the amount of reserves to the banking system. Meaning it will be providing more liquidity to the banking system.
This increase of reserve in the banking system will increase the amount of funds that the banks have with them for both its operations as well as for lending. With the increase in reserve for lending purpose the banks will start lending more and more meaning more supply of money in the economy.
This kind of increase can have two effects in the economy
Economic growth: - the increase in supply of money in the economy will act as a catalyst for growth. With more money there will be more investments, which will lead to increase in variables like income, output and employment. Leading to overall growth in the economy.
Inflation: - so wouldn’t it be better if we keep increasing the amount of money? The answer would be no because increase in money supply can also lead to inflation. With the increase in employment there will be increase in purchasing power of the people leading to more money chasing few goods. The basic thing to notice here is that the output and income does not increase in the same proportion.
Working of FED pass
The Federal Reserve decides to increase the supply of money in the economy. They increase the reserve with the banking system by 100$. Now in a perfect economy where the banking system completely transfers the effect of the central bank to the economy the commercial banks will now lend 100$ to the general public. Hence increasing the supply of money in the economy by 100$