A federal monetary authority of a country can use financial institution to regulate the amount of money in circulation. This is by formulating policies the banks and other financial institutions should adhere to. For instance, banks can be induced to have minimal assets in cash form. By so doing, only small amounts of cash will be available for lending thus reducing the amount of cash in circulation (Heijdra & Ploeg 114). However, such measures are not encouraged as often as it creates very volatile changes in money supply. This monetary tool can be used to stabilize the economy when applied appropriately, that is controlling the amount of money in circulation.
This is a monetary theorist approach lets lending institutions lend money more variedly and at a lower rate. Central bank led money to banks at a very low interests set below short-term markets rates called T-bills (Heijdra & Ploeg 65). This method is use to regulate currency circulation which enable a more accurate assessment of inflation, unemployment, interest rates and economic growth thus stabilizing the economy using the most appropriate tools.
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