Question

The Federal Reserve System

Discuss what you understand by Federal Reserve System and briefly describe the three policy tools the Federal Reserve uses to manage the money supply. What are the Federal Reserve’s four monetary policy goals? Does Federal Reserve System report to any branch of government? If so, explain and briefly discuss the implications. Your discussion must include conspiracy theories about the Federal Reserve. Is Federal Reserve System too powerful? Is it necessary? Can they be effectively and legitimately be controlled or influenced by any branch of the federal government?

Discussion: 17 points ( 400 words)

Answer 1

Part A

Federal reserve system is the central bank of the united states. It performs many functions to sustain the economy. It includes, creates the nation’s monetary policy, stabilizes the financial system of the country, consumer protection and community development, soundness of individual financial system,etc.

Control the money supply of the economy is the principal objective of the central bank of the country. Here the Fed uses three policy tools to control the money supply. It includes open market operation, reserve requirements and discount rate.

Open market operation

The open market operation means that the buying and selling of government securities in the market. At the time of inflation, the Fed sells the securities to the public and at the deflation they buy the securities from the public.

Reserve requirements

The reserve requirements are the amount of cash the bank must hold in reserves against the deposit. At the time of inflation, the reserve requirements will raise and decline at the time of deflation.

Discount rate

It is the minimum interest set by the federal reserve to lend the banks. The discount rate is high at the time of inflation and lowers at the time of deflation.

Part B

The federal reserve has four primary roles in the monetary policy. It includes full employment, price stability and moderate long term interest rates.

Part C

The fed should report its monetary policy reports to Congress in twice a year. The government branch called committee on Banking, Housing and the Urban affairs and also the committee on financial services.

The conspiracy theories are essential to the submission of the report of monetary policy to the government. It checks the fed allegedly creates inflation, recession and depression by manipulating the money supply in the economy.

Part D

The federal reserve system is robust for shaping the economic policy of the country. The principal function of the fed is that stabilizes the economy, regulating commercial banks. Also, it is the banker of government. Also, refer to Part C