Question

• Prompt: Federal Reserve Bank, U.S. Banking System, and Fractional Reserve System. Please write a paper that discusses the role of the Federal Reserve Bank in the U.S. banking system. Describe the Fractional Reserve System and the Federal Reserve Bank’s involvement in it. • Requirements: The paper should be at least 1,500 words. Use APA format and provide at least five peer reviewed references

Answer 1

A Federal Reserve Bank is a regional bank of the Federal Reserve System, it is the central banking system of the United States created by the Federal Reserve Act of 1913. The Fed serves as a banker's bank and as the government's bank.

As the banker's bank, it helps to assure the safety and efficiency of the payments system. As the government's bank or fiscal agent, the Fed processes a variety of financial transactions involving trillions of dollars.

The U.S. Treasury keeps a checking account with the Federal Reserve, through which incoming federal tax deposits and outgoing government payments are handled. As part of this service relationship, the Fed sells and redeems U.S. government securities such as savings bonds and Treasury bills, notes and bonds. It also issues the nation's coin and paper currency.

The Fed controls the supply of money by increasing or decreasing the monetary base. The monetary base is related to the size of the Fed’s balance sheet, specifically it is currency in circulation plus the deposit balances that depository institutions hold with the Federal Reserve. The Fed has essentially complete control over the size of the monetary base.     

The primary way the Fed controls the monetary base is through open market operations: buying or selling securities. To increase the monetary base, the Fed buys securities from any party and pays with a check. That check, written on the Fed, is deposited by a bank in its account with the Fed, thereby adding to its reserves and increasing the monetary base.

The same process works for decreasing the monetary base: The Fed sells securities, getting a check from a bank in exchange. When the check is deposited, the bank’s balance at the Fed decreases. The total supply of money (M1) consists of currency held by the public and checkable deposit balances of banks and other depository institutions.

Monetary policy addresses interest rates and the supply of money in circulation, and it generally is managed by a central bank. Fiscal policy addresses taxation and government spending, and it generally is determined by legislation. Monetary policy and fiscal policy together have great influence over a nation's economy.