Question

Whats the primary role and functions of the Federal Reserve System using specific examples. For example, what are its key macro-activities and their economic consequences?

Answer 1

The primary Roles and Functions of federal reserve are:

a) Manage Inflation:

The Federal reserve controls the inflation rate in the country and they try to maintain the rate as per the targets. Fed moderates the long term interest rate through the OMO of fed funds rates. When there is low inflation fed reduces the interest rates and makes the credit cheap.

b) Supervise and regulate the banks:

The Fed supervise and regulates the banks so that banks do not conduct any fraud or falsify the money of the customers. They also keep intact if the banks are following the Dodd frank act as well as other provisions.

c) Maintain the stability in the financial system:

They work closely with the treasury department so that there wont be any global financial collapse like wise with what happened in 2008 global financial crisis.

d) Provide banking service:

They monetize the debt in the market. The Fed also creates money, they buy the treasury and add money to the supply in the economy. Fed is also called bankers bank.