Question

IN YOUR OWN WORDS: Analyze the importance of the Fed for the United States economy. How important is the Fed to help stabilize the direction of the economy?

Answer 1

The Fed is the central bank of the United States and it is primarily responsible for the following three functions:

• conducting the monetary policy of the country
• building and maintaining an effective and efficient payments system for smooth monetary transactions
• supervising and regulating banking operations.

All these functions have a very important role of on the USA economy. The effective monetary policy helps in regulating money supply to maintain stable economic growth, employment level and price level. Smooth payment systems help in executing monetary transactions and their settlements. This keeps the economy functioning. Finally, supervising and regulating banks help in ensuring effective banking and financial system, risk optimization, investors and depositors' protections, etc. Therefore, the Fed is probably the most important economic agency in the USA.

The Fed helps in stabilizing the economy with the help of monetary policy. When the economy slows down, the Fed increases the money supply to stimulate the economy. On the other hand, the Fed lowers the money supply in order to lower inflationary pressure and stabilize the economy.