The Role Of The Federal Reserve In The United States Economy

1480 words - 6 pages

In this essay I will discuss the role of the Federal Reserve in the United States economy. In doing this I will look first at open market operations as a tool to influence money supply. Then, I will look at discount rate and federal funds target rate and how the Federal Reserve uses it to influence money supply. Lastly, I will look at required reserve ratio and  deposit expansion (money) multiplier as a tool the Federal Reserve uses to influence the money supply. Throughout discussion of these concepts I will give my opinion on how the Federal Reserve might best employ each of these tools given to our certain economic situation which would be to lower money supply to avoid inflation.

The Federal Reserve System, also known as the Fed, is the United States central bank and is responsible for all other banks in the US and for the amount of money we have in the economy. The Fed is run by a board of seven governors that are appointed by the president and then approved by the Senate. The main reason we are concerned about how the Fed's effect the economy is because it has the ability to set the rates for interest and also can effect inflation. It can lower or raise inflation with monetary policy and raise or lower interest rates. Now we will look at how the Fed uses open market operations as a tool to influence the money supply.

Open market operations is when the Fed purchases or sells US bonds. The Fed uses open market operations most often because it is an easy way to effect the money in the economy without having to change any banking regulations or laws. In a single day the Fed can effect the money supply by having the New York branch of the Federal Reserve buy or sell bonds in the US bonds market. The way that the Fed increases the money supply within the economy is to get the New York bond traders to buy up US bonds. The money that the Fed spends on bonds, causes more money to be funneled into the economy. Of the money added to the economy, some is held as currency while others is deposited into banks, which causes the supply of money to be raised in both cases. You can see how doing this greatly effects the amount of money in the economy on any given day. On the contrary, by selling bonds, the Fed can lower the amount of money in the economy by selling bonds to the general public which causes the banks to have less money and therefore lowers the amount of money disseminated throughout the economy. It also means that banks have less money in their reserves which means less loans are given out. I think the best way for the Fed to help the current economy is to decrease the money very carefully by slowly selling US bonds and decreasing the amount of money in circulation and hopefully stimulating the economy through real money, not money from loans.

When we look at how banks borrow money, there are two options for them. The first is the discount rate and is what the Fed charges bank to borrow directly from them. The discount rate is used to...

Find Another Essay On The Role of the Federal Reserve in the United States Economy

The United Stated Federal Reserve Board

1289 words - 6 pages 1. What is the Federal Reserve Board (the Fed) and how does it attempt to prevent and curtail unemployment? The United Stated Federal Reserve Board (the Fed), a component of the Federal government, conducts monetary policy. The Fed essentially plays the role for the nation’s banks that these banks play for us. Just as we borrow money from the banks, the banks borrow money from the Fed. Just as we pay interest on the money we borrow, banks pay

Issues Americans Cannot Understand: The Federal Reserve and the Economy

1663 words - 7 pages Over the last 3 years the United States has seen an incredible flux in the economy from an all time high, to the lowest position since the Great Depression. Many Americans have no idea why or how these cycles affect their everyday lives, most importantly, they do not understand how the government intervenes to control these issues. Most people cannot comprehend the complexity of the United States banking system, how the Federal Reserve (FED

Role of Federal Reserve

1128 words - 5 pages Federal Reserve exists to play a role as the last resort of lender for the US economy where International Monetary Funds (IMF) exists to play a similar role for global economy. The International Monetary Fund has become a powerful international institution that provides loans to governments of member countries unable to meet their international financial obligations, such as to public and private lenders or to trade partners. The IMF has played

The Federal Reserve Bank and the Decline of the U.S. Economy

3539 words - 14 pages led to the current economic crisis in the United States. Before we begin our investigation, it is imperative that we understand the historical role of the central bank in the United States. Examining the traditional motives of this institution over time will help the reader observe a direct correlation between it and its ability to manipulate an economy. To start, I will examine one of its central policies: the fractional reserve banking system

The Federal Government and its Role in the States

617 words - 2 pages education system in the United States. The more money they gave to the state, the more power they got. When the federal government gives money away they get power in return. Responsibility among the state and the government are also known as devolution. The federal government takes care of issues like health care, education while states take care of welfare and some aspects of education. The state has to take care of welfare with the money the

Major Federal Anti-trusth Laws in the United States

972 words - 4 pages contract for both of them stating that they could not join forces. The FTC certainly seems to show the position that the law is the law and no matter who you are, there will be consequences. Works Cited United States Federal Trade Commission: Guide to Antitrust laws. Retrieved from: http://www.ftc.gov/tips-advice/competition-guidance/guide-antitrust-laws US Department of Justice: Antitrust Enforcement and the Consumer. http://www.justice.gov/atr

Role of the United States Constitution

740 words - 3 pages referred to as Congress; the executive branch, which is often referred to as president; and the last branch, the judicial branch, which is commonly referred to as the courts. In order to ensure no branch would be more powerful than the other, checks and balances were built into the Constitution. Today’s paper will discuss my company insurance benefits as it relates to same sex marriage, and also illustrate the role of the United States

Role of the United States Constitution

784 words - 3 pages would not have had the ability to gain wage increases or employment opportunities. The Fair Minimum Wage Act of 2007 also "…includes a $4.84 billion package of assistance for small businesses to encourage employment and create jobs" (Eshoo, 2009, p.2, ¶2).The United States Constitution and its legal system play a significant role in how businesses establish regulation. The laws endeavored in these branches provide successful operations

The Welfare Programs and The Economy in the United States

1362 words - 6 pages ignorant Americans to not get a job because they can get the same amount of money in the form of a hand out instead of actually working for it and contributing to the economy. The tax breaks for small firms and other factors are reliant by how much small businesses spend on health coverage (Harrison). Tax breaks are only given out is small businesses give a lot of health coverage. When small businesses save money, they can't keep some of it to

Emerging role of the United States in mid-20th century

948 words - 4 pages in the fall of 1945 and drove the Vietminh from many of the larger cities. The United States entered the Vietnam struggle in the 1950’s with the Truman administration sending the first U.S. aid package “The Military Assistance and Advisory Group” (MAAG), under the command of General Francis Brink which was to instruct the French, and the non-communist Vietnamese, in the use of the American weapons and tactics, which were being supplies in ever

Slavery and the Economy in the United States

717 words - 3 pages were making the pockets of others full at their own expense.According to Dodson, the invention of the cotton gin in 1793 gave slavery a new life in the United States. Alabama, Mississippi, and Louisiana became the heartland of 'King Cotton'--America's cotton kingdom. Dodson states that by the Civil War, cotton was the South's chief crop and totaled 57 percent of all U.S. exports. This boom in economy was stimulated by the labor supplied by the

Similar Essays

How The Federal Reserve System Works In The United States

1172 words - 5 pages selective in judging the creditworthiness of business applications for loans. Conversely, when interest rates decline, money is called "easy", meaning that it is not only cheaper but also easier to borrow.Although changes in the discount rate can be used as a major means of controlling the money supply and are used to control it in some countries, they are nit used for this purpose in the United States. The Federal Reserve Board does not allow banks to

The United States Treasury And The Federal Reserve

2009 words - 8 pages , get elected into office. But we, the people, have little to no say in who gets elected; instead they get appointed by the President of the United States. The President appoints seven people into office on the Board of governors to oversee the Federal Reserve, and the 12 District Reserve banks. Although the Board of Governors is a federal government agency, it is independent and therefore does not receive any funding at all from Congress. They are

Role Of The Federal Reserve Bank Today

1880 words - 8 pages Federal Reserve or simply “the Fed,” signed by President Woodrow Wilson, established the Federal reserve banks, an elastic currency, afford means of rediscounting commercial paper, and for more effective supervision of banking in the United States. The act was created by the Congress to provide the nation with a safer, more flexible, and more stable monetary and financial system (FRB). The Federal Reserve’s responsibilities has been broken down

Role Of Federal Reserve In Casuing The Great Depression

2546 words - 11 pages Federal Reserve played a significant role in causing the Great Depression. In their book, A Monetary History of the United States, 1867–1960, they explained the events propelled the nation and the rest of the world into a long and grueling depression. Friedman argued that the nation could have recovered rapidly if only the Federal Reserve had not engaged in a series of disastrous policies in the aftermath of the crash. Friedman and Schwartz