Question

6.What were some of the weaknesses of the national banking system that gave rise to the Federal Reserve Act?

7.Briefly describe the traditional monetary policy functions and instruments used by the Fed.

8.Describe the process by which the Federal Reserve System assists commercial banks in the clearance and collection of checks.

Answer 1

6. The Federal Reserve Act of 1913 is U.S. law establishing the current system of the Federal Reserve. Congress enacted the Federal Reserve Act to create economic stability in the United States through the creation of a central bank with monetary policy supervision. The Federal Reserve Act of 1913, which President Woodrow Wilson signed into law, gave the 12 Federal Reserve banks the ability to print money to ensure economic stability. The Federal Reserve System developed a dual mandate to increase jobs and keep inflation low.

7. Central banks have three main monetary policy tools: open market operations, the discount rate, and the reserve requirement. Most central banks also have a lot more tools at their disposal.

Open Market Operations- It is when central banks buy or sell securities that open market operations happen. These are purchased from or sold to private banks in the country. This adds cash to the assets of the banks when the central bank buys securities. That allows them to lend more money. Once central bank sells the securities, they are put on the balance sheets of the banks and their cash reserves are the. The bank has less to borrow now. When a central bank wants an expansionary monetary policy, it buys securities. When it conducts a contractionary monetary policy, it sells them.

Reserve Requirement- The provision for reserve applies to the money banks must be kept on hand overnight. They can hold the fund either in their vaults, or at the central bank. A requisite low reserve helps banks to lend more of their deposits. It is expansionary in that it provides credit. A demand for high reserves is contractionary. It is giving less money to lend to the banks. It's particularly difficult for small banks, as they don't have as much to lend first. That's why most central banks don't allow small banks to make reserves.

Discount Rate- The third method is discount rate. It is the amount its members are paid by central banks to borrow at their discount window. Because it is higher than the rate of fed funds, banks use this only if they can't borrow money from other banks.

8. Regional banks follow the monetary policies set by the Board of Directors by ensuring that all depository institutions–commercial and cooperative savings banks, savings and loan associations and credit unions–are able to access cash at the current discount rate They also support the FOMC and the Federal Reserve by contributing to monetary policy formulation. Each regional bank has a staff of researchers who gather information about their area, analyze economic data and investigate economic developments. These researchers advise regional bank presidents on policy issues, who then make the information available to their constituencies for public opinion survey.