Question

1. 1. Provide a brief history of the Federal Reserve, including an explanation of why it was created.
   2. Explain what the dual mandate is and how it guides the actions of the Federal Reserve
2. Money supply
   1. Describe the goals of the Federal Reserve’s monetary policy
   2. Explain the tools used to regulate the money supply
3. Relationship with Congress
   1. Explain who controls fiscal policy and how it attempts to close a recessionary gap.

2. Describe why it is important for the Federal Reserve to maintain its independence from Congress. Why might Congress attempt to influence the Fed’s actions?
3. and source or retrieval information.

Answer 1

Federal Reserve enacted in 1913 to averted financial distress and implementation of monetary policy regime to combat crisis and at same time inflation control mechanisms.

Maximisation of employment and controls on inflation are dual mandated defined by US Federal reserve. To balance this Fed acts to implement expansionary or contractionary monetary policy to achieve its objectives by controlling money supply through interest rates and open market operations.

The three goals of monetary policy is :

• Reducing unemployment
• Stabilitizing inflation
• Boost economic growth.

However fed faces problems as described in Phillips Curve where low unemployment leads high inflation and thus balancing both is an uphill task.

Relationships with Cingress is to avert financial crisis and get monetary policy passed. Key tools used are interest rates, CRR, SLR, Bond buying and selling.

Fiscal policy is solely controlled by ruling government and recessionary gap is closed using higher government spending and tax cuts aggressively.

Fed has to maintain independence from Cingress as its judiciary duties are different and objectives too. Maintaining different alignment is key, however in best interest of economy Cingress can attempt to influence US Fed to move in predetermined direction which benefits the nation as whole.

References b Federal reserve system, how it works and what it does, by Kimberly Amadeo, March 17th 2020, The Balance.

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