Question

Should the Federal Reserve System control the nation's money supply? Defend your position using economic principles.

Answer 1

Yes, the Fed should control the money supply in order to keep the financial and economic system of the country stable. Without the Fed's control, the fluctuations in the business cycles such as recession and inflation will go on unchecked and destabilize the economy.

When the money supply in the economy increases, the aggregate expenditure increases which increase the real output and the price level. If left unchecked, the inflation will keep rising and lead to hyperinflation so, intervention by the Fed is needed to decrease the money supply in order to bring the inflation down.

On the other hand, if the money supply decreases, the aggregate expenditure decreases which decreases the aggregate expenditure which decreases the real output so if left unchked it will lead to loss of emploment and lead to negative economic growth so intervention by the Fed is needed to increase the money supply in order to stablize the economy.