Question

i want an opinion on why you think the federal reserve is an effective central banking system? why? would there be another option to try?

Answer 1

The Federal Reserve System is the central bank of the United States. It was founded by Congress in 1913 to provide a safer, more flexible, and stable monetary and financial system to the nation.

The Federal Reserve control the supply of money in the economy. Its monetary instruments affects the supply of money in the economy. These instruments are:

1. Open market operation : Sale and purchase of government securities in the open market by the Federal Reserve affects the supply of money. Sale of securities decreases the money supply and vice-versa.

2. Discount rate : The interest rate charged to commercial banks and other depository institutions for loans received from the Federal Reserve. Increase in discount rate reduces the money supply and vice-versa.

3. Federal funds rate : It is the rate charged by the different commercial banks on the overnight loan from other commercial banks.

These rates are determined by the Federal Reserve. It changes these rates according to the situation of the economy. If there is inflation then Fed will increases federal funds rate and discount rate and vice-versa.

Yes, it is an effective central banking system because it controls inflation and deflation using its monetary tools.