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In: Economics

Briefly explain the role of the central bank (Federal Reserve) in the economy.

Briefly explain the role of the central bank (Federal Reserve) in the economy.

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Expert Solution

The central bank is responsible for controlling the level of money supply in the economy and it can play an important role in an economy via monetory policy. Central bank can interfere in the economy via using the tools of the monitory policy which includes the open market operations and setting the reserve requirements for the commercial banks. For example, during the recession, the central bank can help the economy to get out of recession by using the expansionary monetary policy in which central bank buys the securities through the open market purchase and lowers the reserve requirement. On the other hand, central bank also plays a crucial role in controlling the inflation in the economy in which central bank uses the contractionary monetary policy to reduce the inflation rate in the economy. Contractionary monetary policy includes selling the securities via open market sale and increasing the reserve requirements.

Rahul Sunny answered 1 year ago
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