Basic Economics: The Federal Reserve Board; Monetary And Open Market Policies

918 words - 4 pages

What lies beneath the society we created? What binds all that we hold dear, if not economics? The first in control of the U.S federal system is The Federal Reserve Board. The chairman of the Federal Reserve Board is considered the second most powerful person in the world; second only the President of the United States. Though, so power the Fed (Federal Reserve Board) only has two functions: Monetary and Open Market policies. With these tools are their control, the Fed can save or destroy the American Economy by expanding and contracting the money supply.Monetary policy is based the Fed's relationships with the private banks of the US. The 12 Federal Reserve banks are the banker's bank. They provide the money that fills the private banks the US in doing so they can also control what is done the money including how you spend or save your money. The first option the Fed has is the interest rates (also known as the discount rate) in which they lend the money to banks. With an increase of the interest rates the increase "price" of the money is passed on the people as increase in interest rates for personal loans. One might ask why the Government would condone such a thing? In dives into a simple concept of supply and demand; when there is a lot of something the value of it goes down, this is true for money also. If everyone spends their money, too much money will be available, thus the value of money goes down in which prices will go up, a process called inflation. Amazingly deflation occurs when there is not enough money available and the price drop and no one can get enough money to pay for goods. In conclusion when the Federal Reserve Board decides to increase the interest rates the amount of money that banks will consume will decrease and so will the money in circulation.The reserve ratio has a dual purpose that we will dive into later. The reserve ratio is the percent of money taken in by banks that must stay in banks. An example is that if you put 100 dollars in a bank and the reserve ratio was at 10% the bank would be required to keep 10 of your dollars in the bank and would be allowed to loan out the rest. One would tend to ask, what does this mean? The bank owes you interest because you deposited your money into it, so it needs to make money to pay you bank and to make profit to expand the business, it does this mostly by loaning the money out for a higher amount of interest then the bank owes you...

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