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What effect does the Federal Reserve have on the economy? What effect does the Fiscal Policy have on financial markets?
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This solution describes the effect the Federal Reserve has on the economy. It also outlines the effect Fiscal Policy has on financial markets.
US Federal Reserve
The United States Federal Reserve, more commonly referred to as "the Fed", is the government body that serves as the guardian for our economy. This governing body is responsible for deriving and implementing policies to keep our economic situation in check. It also serves as the regulator of the nation's financial institutions. The Fed was established in 1913 and it is independent within the government, though it is accountable to the Congress and is subject to audits and reviews.
According to Investopedia.com, the Fed's mission is to "promote sustainable growth, high levels of employment, stability of prices to help preserve the purchasing power of the dollar and moderate long-term interest rates." The US Federal Reserve has four important duties: a) the twelve federal banks provide services to financial institutions, b) serves as the government's bank (the US Treasury has an account with the Fed), c) the Fed board regulates and supervises responsibilities over banks and most importantly, d) devise and implement monetary policies.
The Federal Reserve implements monetary policies to influence the amount of money and credit available. By doing so, it affects the interest rates and affects peoples' and businesses' demand of good and services. By implementing a monetary policy, the Fed tries to set the economy to the right level. They have three main tools that they use in order to implement a monetary policy and they can do a combination of three at any point: open-market operations, discount rates and reserve requirements.
The Fed's goal is to have high employment conditions, stable prices of goods and have a strong dollar with continued growth. In a nutshell, the Fed is concerned about having the economy in balance. In a recession, there is a fall in our Gross Domestic product for two or more consecutive quarters, a period of decline in our overall economic ...
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