Question

Please write about the Federal Reserve Bank and its management of the money supply in the United States. How does the Federal Reserve manage the money supply in the United States? What actions does it take to increase and decrease the money supply? Include information about monetary policy and fiscal policy.

Answer 1

The Federal Reserve controls monetary policy in the US So,aiming to ensure a safe and stable financial system

In 1913 the Federal Reserve Act established the Federal Reserve System an independent govermental entity that would serve as a central bank to the U. S government. Banks mission is to provide the nation with stable monetary policy and a safe and flexible financial system

The system is comprised of 12 region reserve member banks, each of which focuses on its particular geographical zone in coordination with New York Fed

12 Reserve Banks oversee the regional member banks, protect regional economic interests and ensure that the public has clout in Central Bank decisions.

Although Federal Reserve Banks don't operate for profit, they generate income from interest on government securities acquired through Fed monetary policy actions and financial services provided to depository institutions. Each year, after accounting for operational expenses, the regional banks return any excess earnings to the U. S Treasury.

These are the tasks by financial institutions

Facilitating Monetary Policy

Supervising Member Institutions

Servicing the Government

Servicing Depository Institutions

Central banks use several different methods to increase or decrease the amount of money in the banking system. These actions are referred to as monetary policy. While the Federal Reserve Board commonly referred to as the Fed could print paper currency at its discretion in an effort to increase the amount of money in the economy. They are generally held responsible for controlling inflation and managing both short term and long term interest rates. They make these decisions to strengthen the economy and controlling the money supply is an important tool

Modifying Reserve Requirements

The Fed can influence the money supply by modifying reserve requirements which generally refers to the amount of funds banks must hold against deposits in bank accounts. By lowering the reserve requirements, banks are able to loan money, which increases the overall supply of money in the economy. Conversly by raising the banks reserve requirements, the Fed is able to decrease the size of money supply.

Changing Short term Interest Rates

The Fed can also alter the money supply by changing short term interest rates. By lowering the discount rate that banks pay on short term loans from the Federal Reserve Bank, the Fed is able to effectively increase the liquidity of money

Lower rates increase the money supply and boost economic activity however, decreases in interest rates fuel inflation and so the Fed must be careful not to lower interest rates too much for too long.

Conducting open Market operations

Lastly, the Fed can effect the money supply by conducting open market operations, which affects the federal funds rate. In open operations, the Fed buys and sells government securities in open market . If the fed wants to increase the money suply, it buys government bonds This supplies the securities dealers who sell the bonds with cash, increasing the overall money supply.

Conversly, if the Fed wants to decrease the money supply, it sells bonds from its account, thus taking in cash and removing money from the economic system. Adjusting the federal funds rate is a heavily anticipated economic event.

These are the methods used by federal banks