Federal Reserve
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Details: Describe three ways in which the Federal Reserve can change the money supply.
If the Federal Reserve is going to adjust all of these tools during an economy that is growing too quickly, what changes would they make?
If the Federal Reserve is going to adjust all of these tools during an economic recession, what changes would they make?
What changes, if any, to the current condition of these tools would you make at the next meeting of the Federal Reserve? Explain why and the benefits/drawbacks of this strategy.
Describe each tool and how it is used to achieve it desired effect on the US money supply
State how the FED will use each tool to achieve the desired effect on the US money supply
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THREE WAYS IN WHICH THE FEDERAL RESERVE CAN CHANGE THE MONEY SUPPLY
The US money supply comprises of currency, the various kinds of deposits held by the public at commercial banks and the public at different banks and institutions and those items that many regard as a close substitute for money.
The supply of money is important and the Federal Reserve affects the money supply in three important ways. First, the Federal Reserve requires commercial banks and other financial institutions to maintain as reserves a fraction of the deposits they accept. These deposits are held either as cash or a deposits at Federal Reserve banks. Second, the Federal Reserve affect the reserves by issuing loans and third, conducts open market transaction at a Federal Reserve discount rate. These open market transactions are used by the Federal Reserve to increase or decrease the supply of money.
IF THE ECONOMY IS GROWING TOO FAST
If the economy is growing too fast, the Federal Reserve increase the interest rate known as the federal funds rate. This is the rate that banks charge each other. This leads to an increase in the prime rate; this increases the rate at which banks charge on consumer and business loans. The cost of borrowing increases and so ...
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- BSc , University of Calcutta
- MBA, Eastern Institute for Integrated Learning in Management
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