jackson busn5620 week7 personal assignment 1 1 Essay

the market value of all final goods and services produced by the citizens of a country, regardless of where they are living, in a given period of time.

When it comes to the supply of money, different actions are taken to assure stability in our country. To ensure we are keeping consistent with the loss in value of currency throughout the years, the Federal Reserve changes either the inflation or the interest rates so that prices will be able to balance the debt amount. With actions like such, there are purposes sought by the Federal Reserve Act set toward “the Board of Governors and the Federal Open Market Committee…: to promote… the goals of maximum employment, stable prices, and moderate long-term interest rates” (Federal Reserve). These are a matter of acts under the monetary policy. However, today in America, we are still suffering from the continuous increase in our national debt, a problem that has been growing since the start of the new century.

The Federal Reserve has three tools to help maintain and make changes within money supply and policies. The first tool and most popular tool is open market operations. The Reserve uses this instrument to regulate the rate of federal funds within the system, which is merely the rate in which banks borrow reserves from other banks. With this tool, they can alter the interest rates and amount of money on the open market. Therefore, the Reserve can essentially control the total money stream, whether that is expanding and contracting it.

The first to be discussed is the discount rate is the interest rate charged by the Federal Reserve to banks for short term loan basis. The increase and decrease of the money supply is determined by the discount rate. Discount rate would be used is a bank needed twenty million dollars, the money would be borrowed from the United States treasury but has to be paid back at a interest rate of three percent. This monetary tool would be used with inflation if the expected inflation increases so will the discount rate and vice versus at the same rate remaining equivalent. During periods of time with high unemployment rate the discount rate is lowered in order to counteract high unemployment and to prevent the possibility of a recession. Secondly, there is the ratio reserve. Ratio reserve is the amount of money that has to be kept at a bank on reserve; this amount can be adjusted to back outstanding deposits. Ration reserve creates the marginal money supply at any given moment due to the Fed raising or lowering the reserve requirements. Although it is rarely used to control the money supply it is a tool that can be used. An example of how it would be used would be if Will comes in and deposit one thousand dollars and the reserve amount is ten percent, of that one thousand dollars one hundred will go to the reserve ratio. Allowing the other ninety percent to be used as a money supply for loans and etc. In the case of unemployment and high inflation the Fed has to lower the reserve ratio in order to decrease the unemployment rate and inflation because if the reserve ratio is lower then the economy and the money supply is moving more vividly. Lastly is the open market operations. Open market operations is the act of buying and selling Treasury securities’ between the Fed and certain selected banks in the open market, it is directed by the FOMC. Open market operations would be considered

Money makes the world go round. We use it for just about anything, for example, paying bills, buying toys for the kids, getting the holiday ingredients for the family secret recipe, and we even use it as a gift for others. It adds value to some yet adds less to others. But what would happen if the supply of money was to suddenly decrease..or increase? Every bit of money you spend or receive is part of a complex organization known as the Federal Reserve System. The Federal Reserve System acts somewhat like the banks of all banks within the United States that controls our money supply by setting interest rates that can affect our economy. Determining how much you can buy or if you should buy now. The federal reserve should set a fixed interest

One form of direct control can be exercised by adjusting the legal reserve ratio (the proportion of its deposits that a member bank must hold in its reserve account), and as a result, increasing or decreasing the amount of new loans that the commercial banks can make. Because loans give rise to new deposits, the possible money supply is, in this way, expanded or reduced. This policy tool has not been used too much in recent years. The money supply may also be influenced through manipulation of the discount rate, which is the rate if interest charged by the Federal Reserve banks on short-term secured loans to member banks. Since these loans are typically sought to maintain reserves at their required level, an increase in the cost of such loans has an effect similar to that of increasing the reserve requirement. The classic method of indirect control is through open-market operations, first widely used in the 1920s and now used daily to make some adjustment to the market. Federal Reserve bank sales or purchases of securities on the open market tend to reduce or increase the size of commercial bank reserves. When the Federal Reserve sells securities, the purchasers pay for them with checks drawn on their deposits, thereby reducing the reserves of the banks on which the checks are drawn. The three instruments of control explained above have been conceded to be more effective in preventing inflation in times of high economic activity than in bringing about revival from a

By law Commercial banks hold a specific percentage of their deposits and required reserves with the Fed (or central bank). These percentages of deposits and required reserves are held either in the form of non-interest-bearing reserves or cash. The requirement of this reserve is to act like a brake on the lending operations of commercial banks. The Fed can influence the amount of money available for lending and hence the money supply by increasing or decreasing the reserve-ratio requirement. Due to this tool being so blunt it is rarely

The Fed was originally created to prevent the supply of money and credit from dissipating. In the United States today the Fed controls monetary policy. Monetary policy is the process by which the monetary authority of a country, controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability (Unknown). When the United States is smitten-ed by debt the Fed has the ability to lower interest rates. When interests rates are lowered, it encourages people to acquire loans and make acquisitions. The short run effect of this cycle can be positive, the long run may not be as positive. When handled erroneously the long run of inflation will be negative. In the short run when people secure loans, the loan enables the person purchasing power, which may help their finances. If the individual receiving a loan does not financially dispense their loan wisely, that individual can be in a arduous financial problem. A dire financial problem can be the possibility of becoming bankrupt, which leaves the person in a situation that is extremely difficult to over come.

The Fed can lower banks' reserves meaning banks would be required to carry less money on their books and can loan out more to businesses and consumers along with other banks. This approach increases the money supply in the economy. The Federal Open Market Committee meets eight times per year to place key interest rates and to choose whether to increase or decrease the money supply which the Fed does by buying and selling government securities. To comprehend how the Federal Reserve's procedure on interest rates affects you and your business, you should first understand what the Fed is trying to do. The objectives of the Fed’s monetary policy are to encourage sustainable growth in the U.S. economy, support high employment, and keep prices stable.

The Fed was initially given the mission of beginning an “elastic money supply.” The idea was that the Fed could increase or decrease the quantity of money in circulation to concur with the economic drive. This drive could hold prices steady through decent times and depraved times, so they thought.

When the Federal Open Market Committee (FOMC) wants to increase the money supply, they buy up government bonds from the public on the bonds markets (Mankiw, 2009). The result of buying bonds puts money in the pockets of the public, if the Fed wants to decrease the money supply, they sell off bonds. It is generally thought that when the public has more money available to them, they will consume more. This increased consumption should lead to an overall increase in Gross Domestic Product (GDP) and expansion of the economy.

The Federal Reserve has the responsibility of keeping the American Economy as stable as possible. One of the ways that the Fed does this is by implementing contractionary policy. The purpose of contractionary policy is fight against inflation by decreasing the amount of funds in the economy. When a contractionary policy is being pursued interest rates are increased, the reserve requirements increase and the money supply is reduced.

Monetary policy, ‘The government’s policy relating to the money supply, bank interest rates, and borrowing’ (Collin: 130), is another tool available to the government to control inflation. Figure 4 shows, that by increasing the interest rate (r), from r1 to r2, the supply of money (ms) is reduced from Q1

To uncover what is going on now we should begin by explain the current state of the money multiplier. If banks either are unable or choose not to lend deposited funds, this will result in both a decline in the money multiplier and a rise in the excess reserves held by banks. This is exactly the situation that is currently playing out. As you can see from Graph Five, since 2009 the money multiplier has been equal to or below one. This has not occurred since the Great Depression and is a

Which of the monetary tools available to the Federal Reserve is most often used? Why?