Explore BrainMass

Role of Federal Reserve and how it Controls Supple of Money

How do the monetary policies of central banks around the world influence you? How do they influence a nation's economic goals of achieving full employment, controlling inflation, sustaining adequate growth, and achieving a stable balance-of-payments position? Explore the current monetary policies of the Federal Reserve and one other key central bank in the world, and discuss their effect on national economic goals, money supplies, and capital markets.

-Explain how and why central banks around the world have set current monetary policy and their effects on you.
-Describe how current monetary policies of central banks may conflict with one another.
-Define the Federal Open Market Committee of the Federal Reserve in the United States and what it does, and describe the tools available to the Fed to influence the nation's money supply. What elements of another central bank perform similar or the same functions, and what tools are available to it to influence its nation's money supply? Which of these tools have dominated recent actions by the Fed and your other chosen central bank?
-Define the Federal Reserve's open-market operations, and explain why they are important. How does another key central bank conduct such operations, and why are they important? What recent open-market operations have the Fed and another country's central bank taken?
-Describe the current structure of the Federal Reserve System and another central bank.
-Explain what has happened to the U.S. money supply recently when the Federal Reserve bought and sold Treasury bonds. Describe in detail how this has affected U.S. banks' abilities to lend and the overall U.S. economy.
-Explain what has happened to the U.S. money supply and economy recently when another central bank outside the United States has bought and sold U.S. Treasury bonds, and describe in detail how this affected U.S. and foreign banks' abilities to loan and the economy of the U.S. and the foreign country in which this central banks resides?
-What effect have recent actions of the Federal Reserve and another central bank had on the treasury departments of the U.S. and the other country's abilities to raise funds within the global financial system?
-In what way have the Federal Reserve and another central bank been part of recent ethical, economic, demographic, social, and technological forces that have reshaped financial institutions, financial markets, and the global financial system?

Solution Preview

Where does the money in your wallet come from? While it's easy to retort that the money came from the bank or from the ATM, where did the bank get the cash? Presumably, the bank gave you cash or allowed you to use your debit card because you made a deposit in the bank or had a paycheck to cash. However, before you could make the deposit or cash the check, the bank had to have some source of cash on hand. This cash, if the bank is a member of the Federal Reserve, came from the Federal Reserve or "central bank." The local bank has deposits with the Federal Reserve which allow it to obtain cash from the central bank. These deposits are sometimes referred to as "reserves." The Federal Reserve purchased treasury bills from independent security dealers and paid for these treasury bills by creating new reserves in member banks (, 2008).

While this process of money creation may seem difficult to understand, it is essential for comprehending how monetary policy is created and maintained within our economy. Monetary policy is the process by which the government, through the Federal Reserve, controls the supply of money and the interest rate, both of which can be manipulated to achieve growth and stability of the economy.

In particular, ...

Solution Summary

The solution discusses the role of Federal Reserve and how it controls the supply of money