Question

1.What branch of government does the Federal Reserve System report to? Can this create problems?

2.Briefly describe the three policy tools the Federal Reserve uses to manage the money supply.

3.What are the Federal Reserve’s four monetary policy goals?

Answer 1

1. The Federal Reserve (Fed) maintains a unique public / private arrangement that functions within government, but is still largely separate from government to protect the Fed from day-to-day political pressures in performing its varying roles. The Federal Reserve System is regarded as an autonomous central bank. Nevertheless, it's true just in the sense that the President or someone else in the government's executive branch may not have to ratify its decisions. The entire scheme is subject to US scrutiny. The Federal Reserve Congress will function within the scope of the Government's overall economic and financial policy objectives.

2. The Fed can use three tools to achieve its monetary policy goals: the discount rate, reserve requirements, open market operations.

The discount rate is the interest rate on short-term loans that Reserve Banks offer to commercial banks. Federal Reserve discount-rate lending complements open market operations in reaching the federal funds target rate and acts as a source of liquidity for commercial banks to back up. Lowering the discount rate is broad, since certain interest rates are affected by the discount rate. The lower rates allow customers and companies to lend and invest

Reserve requirements are the portions of reserves that banks are expected to keep in currency, either in their vaults or on a reserve bank account. A reduction in reserve requirements is expansionary as it increases the funds available for lending to customers and companies within the banking system. An rise in reserve requirements is contractionary as it decreases the funds available for lending to customers and businesses in the banking system

Open market operations , the acquisition and selling of U.S. government securities, is a effective tool. As we heard earlier, this resource is regulated by the FOMC and run by New York's Federal Reserve Bank.

3. The Federal Reserve has two monetary policy goals: to promote maximum sustainable employment, and stable prices.

The Federal Reserve Act requires the Federal Reserve to conduct monetary policy "to effectively promote the goals of maximum jobs, stable prices and reasonable long-term interest rates." While the Act specifies three distinct monetary policy goals, the Fed's monetary policy mandate is generally referred to as the dual mandate. The explanation is that an economy in which people who want to work either have a job or are likely to find one relatively quickly, and in which price levels (meaning a broad measure of the price of products and services purchased by consumers) are stable, creates the conditions necessary for interest rates to be set at moderate levels