Gregory Mankiw's Brief Principles Of Macroeconomics

I. Introduction The stock market and bond market are both way to invest money in our economy. There are many things to consider before investing into one of these markets. For instance, what will you earn on your money or how much risk is involved? The Federal Reserve is a major player with money supply and interest rates, but fractional lending by banking institutions leads to the money supply. Even though this is true, the Federal Reserve is the institution that sets the table. The governments "Monetary Policy" is ultimately what leads to the fluctuation in the money supplies and setting the interest rates in this country. In a since, the government controls many aspects of both markets.

II. Main Point First, bonds are low risk whereas the stock market is high risk. There are important characteristics to the bonds market,which include terms, credit risk, and tax treatments (Mankiw 8-1a). One reason the bond market is not as risky as the stock market is, because the bond market is not as vilotile. In the text, "Brief Principles of Macroeconomics," author Gregory Mankiw tells us that "compared to bonds, stock offer the holder both higher risk and

I think that the Federal Reserve not only controls the money supply and interest rates, but it is what keeps our country from another depression. They accomplished this feat by using the monetary policy. The monetary policy is used to stablize the economy. The tools the Federal Reserve uses are reserve requirements, discount rates, and open market operations. In a article written by Richard Cloutier, he states that"the reserve ratio is the percentage of reserves a bank is required to hold against deposits" (Investopedia). A decrease in the reserve ratio means that banks will have more money to lend. A increase in the reserve ratio will have the opposite effect. This is one way the Federal Reserve controls the money supply and interest