Money supply – With interest rate at historically low levels, more people are able to qualify for real estate mortgages and are able to buy higher priced homes than if interest rates were at higher levels. Also when interest rates are at such low levels potential buyers develop the attitude that “they don’t want to miss-out” on the low mortgage rates so even if they were not intending to purchase a home for a year or more in the future they often move up their buying plans to get in on the low rates. The effect of this psychological mindset contributes to additional supply/demand imbalance. Money supply
Expansion of Money Supply
The second way that the Federal Reserve Bank sets Monetary Policy is through the expansion and/or contraction of the money supply. Currently the policy is to expand the money supply by many of billions of dollars per month. This is often termed “printing money” and is accomplished by contracts the Federal Reserve Bank sets up with the United State Treasury Department through the buying and selling of bonds, where money is really created out of thin air. This monetary policy can lead to inflation as has happened many times in the past. The main reason that consumer prices have not currently increased is due to the continuing effects of the recession and the anemic economic recovery that the economy is experiencing.
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