The federal reserve system Essay Example | Topics and Well Written Essays - 750 words

The federal modestness system - Essay ExampleThe plyeral Reserve, or the central avow, is among the most powerful economic groundwork in the United States of America. The plyeral Reserve was given the power over regulation of the value of coin by congress. In simple terms, the Federal Reserve came into being by enactment of the Congress. Consequently, the Congress has the duty of overseeing the monetary policy and the Federal Reserve. This paper analyzes the importance of the Federal Reserve and strategy in modify the economy of the country. The Fed System consists of a board of Directors, 12 regional bank branches in study US cities, and the Federal Open Market deputation (FOMC), the decision making unit of the Fed (Wells 19). The functions of the Fed are vital to the economy of the US as they play a major role in management aggregate demand, total spending, and most importantly, inflation. In the management of aggregate demand, the Fed applies relatively hi-fi counter-cyc lical monetary policy to manage economic activities or aggregate demand. This iterates to the essence of monetary policy in the business cycle the recessions and booms are direct effects of monetary policy set in place. Ultimately, the stability economic activities depend on the stability of the monetary policies. The monetary policy upheld by the Fed alike determines the inflation rate in the country. The government at times uses inflation to increase tax revenues thusly reducing its debts. On the negative side, inflation disrupts the price system, thus affecting the free market economy. From these deductions, the permanent solution to inflation is stabilizing prices. This can be made one of the monetary policies of FOMC by the Congress. other important role played by the Fed is that of being the lender of last resort. During crises, the Fed whitethorn increase the reserve or runniness demand compulsions thus automatically preventing liquidity shortages and stabilizing the e conomy. These liquidity reserves need to be adequate and available in economic crises. The Fed also influences the recreate rates of major economic sector like automobiles, investments, and housing. The Fed, through its Federal pass Market Committee (FOMC) unit, controls the economy of the nation through its monetary policy. pecuniary policy is the strategy of either decreasing or increasing the supply of money to enhance a stable growth of the economy. The Fed, with the authority installed upon it in the Monetary Control Act of 1980, may influence the economy through its three main tools reserve requirements, open market ope symmetryn or interest rates (Wells 4). On the reserve requirement, the Fed may bring down a reserve requirement ratio that is either lower or higher than the prevailing ratio, depending on the nature of the crisis. This rule applies to all the operational banks regardless of their membership to the Fed. An increase in the reserve ratio requirement decreases the supply of money in the economy, and vice versa. To understand this concept, let us assume that the Fed has imposed a 10% reserve requirement on banks. This translates to 10% of all deposits made. Some calculations translate to ten times the amount of money created, or in general, 1/R, where R is the reserve requirement ratio. Since the banks require only 10% of the amount deposited by their clients for reserve, the actual deposit equals 10% of the number of loans the bank can create. Therefore, the number of total loans a bank can create equals to the actual deposit separate by the reserve requirement. The reserve requirement ratio is very powerful tool, and has only been used cardinal two times in a period of 40 years. Nevertheless, the reserve ratio has been maintained at 50% since 1974. The discount rate is also biased by the FOMC for stability of the economy. Discount window is an stinting term that refers to the Feds when it lends out money to banks, and the interest rate is known as the discount rate (as the banks move assets in exchange for cash). For