Question

Should the Federal Reserve System control the nation's money supply? Defend your position using economic principles and utilize the Monetary Policy Report to Congress and an assessment of the existing reporting of money supply measures to support your work.

Post your response, and then read and reply to classmates' posts.

I need a typed answer.

Answer 1

The Fed can use three tools to achieve its monetary policy goals: the discount rate, reserve requirements, and open market operations. All three affect the number of funds in the banking system.

In order to accomplish the monetary policy objectives, there is three main type of tools which are available to the Fed and these are discount rates, reserve requirement, and open market operations.

Discount rates are the interest rates at which the short-term debts are given to other banks by Fed. While reserve requirements are the amount of the money which is mandatory to be deposited by the various banks with the Fed. While open market operations are the buying and selling of government securities in the open market.

In my opinion, FED must be having the authority to control the money supply in the country. As we know that the Fed is responsible for deciding on the monetary and fiscal policies of the country which have a long-lasting impact on the economic environment and financial position of the economy and thus the inflation, rate of unemployment, foreign exchange value of domestic currency and many other types of direct and indirect impact are initiated from these policies.

The main reason for the independence of Federal Reserve from any kind of political or governmental interference while maintaining the money supply is that this kind of freedom will insulate the FED from any kind of short-term political pressures which could be exerted to gain some political mileage, especially during the elections. If there is no freedom or independence given to FED, there could be greater chances that the rulings, operations of FED could be influenced by election focused politicians for enacting an excessively expansionary monetary policy to tackle the issue of unemployment in the short term. Yet this could facilitate the relief from short-term unemployment but in case of the long term, this will lead to a high inflation in the economy and greater problems of unemployment.

Supporters of autonomy of FED further voice that the long-term economic objectives are better matched by an independent FED. In fact, the execution of the policies is far better in case if independent FED particularly those which are politically unpopular but have a greater long-term public interest.