...The Federal Reserve acquires its unique powers through its ability to issue money. Open your wallet or your purse and take a look at some bills. At the top, you will see the words “Federal Reserve Note.” In the past, many banks issued their own bank notes, which were used as money. But today the money we use in the United States is provided by just one bank, the Federal Reserve. Thus, the Federal Reserve has the power to create money—an awesome power that forms the centerpiece of this chapter. The Fed doesn’t have to literally print money. It can, as we shall see in more depth later in this chapter, also create money “by computer” by adding reserves to bank accounts held at the Fed. This new money can be given away or lent out in a way that increases aggregate demand. If the Federal Reserve is a bank, who are its customers? The Fed is both the government’s bank and the banker’s bank. As the government’s bank, the Fed maintains the bank account of the U.S. Treasury. When you write a check to the IRS to pay your taxes, the money ends up in the Treasury’s account at the Fed. In addition to receiving money, the U.S. Treasury also borrows a lot of money and the Fed manages this borrowing—that is, the Fed manages the issuing, transferring, and redeeming of U.S. Treasury bonds, bills, and notes. Since the U.S. Treasury is by far the world’s largest bank customer—it has more income and it also borrows more than any other bank customer—the Federal Reserve is a large and powerful bank. ...
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...Currency and Coin – Federal Reserve An important function of the Federal Reserve is ensuring that enough cash is in circulation to meet the public’s demand. An important function of the Federal Reserve is ensuring that enough cash—that is, currency and coin—is in circulation to meet the public’s demand. When Congress established the Federal Reserve, it recognized that the public’s demand for cash is variable. This demand increases or decreases seasonally and as the level of economic activity changes. For example, in the weeks leading up to a holiday season, depository institu¬tions increase their orders of currency and coin from Reserve Banks to meet their customers’ demand. Following the holiday season, depository institutions ship excess currency and coin back to the Reserve Banks, where it is credited to their accounts. Each of the twelve Reserve Banks is authorized by the Federal Reserve Act to issue currency, and the Department of Treasury is authorized to issue coin. The Federal Reserve Board places an annual printing order with the bureau and pays the bureau for the cost of printing. The Federal Reserve Board coordinates shipments of currency to the Reserve Banks around the coun¬try. The Reserve Banks, in turn, issue the notes to the public through depository institutions. Federal Reserve notes are obligations of the Reserve Banks. The Reserve Banks secure the currency they issue with legally authorized collateral, most of which is in the form of U.S. Treasury securities...
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...target, then the Fed should raise the real Federal funds rate by one-half a percentage point. growth in the money supply should be limited to the long-run average growth rate of real GDP. the rate of money growth should be set at 4 percent per year. for every 1 percentage point that unemployment exceeds the natural rate of unemployment, there is a 2 percentage point gap between potential and actual GDP. The demand for Federal funds is upsloping. downsloping. vertical. horizontal. Generally, the prime interest rate: is highly inflexible downward. remains constant over long periods of time. moves in the same direction as the Federal funds rate. moves in the opposite direction as the Federal funds rate. Which of the following statements is correct? Interest rates and bond prices vary directly. Interest rates and bond prices vary directly during inflations and inversely during recessions. Interest rates and bond prices are unrelated. Interest rates and bond prices vary inversely. (Last Word) Other things equal, a restrictive monetary policy during a period of demand-pull inflation will: increase productivity, aggregate supply, and real output. increase the interest rate, reduce investment, and reduce aggregate demand. lower the price level, increase investment, and increase aggregate demand. lower the interest rate, increase investment, and reduce net exports. (Consider This) The Fed is like a sponge...
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...The Federal Reserve System I would like to start this paper by giving a clear definition of the federal reserve system: The Federal Reserve System most well known as “the Fed” is the central banking system and monetary authority of the United States. The Fed is made up of regional Federal Reserve banks and the Federal Reserve Board of Governors, which their main responsibility is to supervise and to examine the state-chartered member banks, also to regulate banks holding companies, and finally to be responsible for the conduct of the monetary policy. Furthermore, some of the most important duties of the Fed are to keep full employment and to maintain a low state of inflation (CPI= 2%). In order to clearly understand this concept and its purpose, it is also necessary to give a clear definition of the word money. As stated in the Webster dictionary, money is: “A commodity, such as gold, or an officially issued coin or paper note that is legally established as an exchangeable equivalent of all other commodities, such as goods and services, and is used as a measure of their comparative values on the market.” Money has three basic functions: a medium of exchange, a measure of value, and a store of value. Goods and services are paid for in money and debts are brought upon and then paid off in money. Without money, economic transactions would have to take place on a trading basis. In conclusion, money is a good thing for Humanity. It frees people from spending too much time running around...
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...U. S. Federal Reserve's Monetary Policy Eco 561 June 22, 2010 Douglas C. Holbrook U. S. Federal Reserve's Monetary Policy The Fed can be considered second to the President of the United States as one of the most influential and powerful men in the United States. As the world tunes in to the and monetary decisions that the Federal Reserve makes, those deacons impacts trillions of dollars and hundred of millions of people. It is important to understand the function of money, the structure of the Fed Reserve and purpose, how the central bank controls the money supply and lastly what current monetary policy has the Fed enacted to boost up the economy. The Purpose and Function of Money Money is an economic resource. It is a mean to obtain value to be utilized for different purposes in ways other than the manner earned or realized. Money and its function simplify the production and use of wealth. It is defined as anything that is “widely accepted as a medium of exchange” (McConnell, Brue, & Flynn, 2009). Some of its functions are as follows: * Unit of account – monetary units are used as yardsticks to measure the comparative value of an array of goods and services, and resources. * Store of value/wealth – enables people to purchase goods and services in the present or future. * Medium of exchange – it is usable for buying and selling of goods and services. Money allows society to escape the complication of barter. As for the medium of exchange or...
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...The Federal Reserve controls the economy of the United States through a variety of tools. They use these tools to shape the monetary policy of the United States in order to promote economic growth and reduce the rate of inflation and the unemployment rate. By adjusting these tools, the Fed can control the amount of money in the supply. By controlling the amount of money, the Fed can affect the macro-economic indicators and steer the economy away from runaway inflation or a recession. The Federal Reserve The Federal Reserve uses three main tools in order to control the money supply. The first tool is open-market operations. These operations consist of the buying and selling of government bonds to commercial banks and the public. Open-market operations are the most important tool that the Fed can use to influence the money supply (Brue, 2004, p. 252). By buying bonds from the open market, the Federal Reserve increases the reserves of commercial banks that in turn will increase the overall money supply in the country. The opposite is true if the Fed sells bonds on the open market. By doing so, the Fed reduces the reserves of banks and, in turn, takes money out of the system. By being able to control how much money the commercial banks can lend, the Fed has a very powerful tool to adjust the economy. The second tool in the Federal Reserve’s arsenal is the adjustments of reserves ratio. The reserves ratio is the required amount in which a bank must have at all times. By raising...
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...-The Federal Reserve’s control of money supply, Federal Reserve’s influence on interest rates, and the treasury department Andrew Jackson once stated “The bold effort the present (central) bank had made to control the government ... are but premonitions of the fate that await the American people should they be deluded into a perpetuation of this institution or the establishment of another like it.” (http://quotes.liberty-tree.ca/quotes_by/andrew+jackson). Since the Federal Reserve was established in 1914, the amount of power it has acquired over time has become very substantial. The Federal Reserve has a large control over the supply of money within the country, the Federal Reserve can control the flow of money in and out of the government, this is all because the fed controls the monetary base. There are two types of economist Monetarist Economists and Keynesian economists, In the following paragraph I will explain what the difference between these two types of economist are and how they believe the Fed controls the money supply. Not only does the Fed have a large influence on the money supply within the economy. The Federal Reserve also has a tremendous amount of power over the interest rates that are being used in today’s economy. Many of the ways that money supply can be altered can also heavily affect the feds fund rate in a predictable manner, the Federal Reserve uses that to their advantage even though they cannot set a rate for the Fed funds rate, they can hold it around...
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...1. | Banks can borrow money from what sources? I. other banks II. the Fed's discount window II. ATM machines | | A. | I only | B. | II only | C. | III only | D. | I and II only | | Correct | Points Earned: | 1/1 | Your Response: | D | 2. | For a given money multiplier, a decrease in the banking system's reserves will cause the money supply to: | | A. | increase. | B. | decrease. | C. | remain constant. | D. | become difficult to predict. | | Incorrect | Points Earned: | 0/1 | Your Response: | A | 3. | When the Fed wants to increase interest rates, it: | | A. | instructs banks across the nation that they must raise their rates. | B. | sells bonds in the open market. | C. | buys bonds in the open market. | D. | adjusts the fractional reserve ratio. | | Correct | Points Earned: | 1/1 | Your Response: | B | 4. | Which of the following are the least liquid assets? | | A. | currencies | B. | checkable deposits | C. | small-time deposits | D. | savings deposits | | Incorrect | Points Earned: | 0/1 | Your Response: | B | 5. | If the Fed buys bonds in the open market: I. investment spending will increase. II. short-term interest rates will increase. III. inflation will increase. | | A. | I and II only | B. | II and III only | C. | I and III only | D. | I, II, and III | | Incorrect | Points Earned: | 0/1 | Your Response: | B | 6. | A bank will become illiquid if:...
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...The Federal Reserve Term Paper The Federal Reserve After several periods of economic and banking problems, the United States of America was searching for a fix. In December of 1913, the American Congress approved the Federal Reserve, which President Woodrow Wilson signed into law. By 16 November 1914, a working Federal Reserve was set up in 12 cities chosen as regional Reserve Bank sites. These reserve banks were privately owned banks. The Federal Reserve wielded unprecedented power, which was noticed during the beginning of World War I (WW-I) when the Federal Reserve set interest rates for American banks and helped finance Europe’s war efforts until 1917, when the U.S. declared war on Germany and financing America’s war efforts became paramount (Education, 2013). “I am a most unhappy man. I have unwittingly ruined my country. A great industrial nation is controlled by its system of credit. Our system of credit is concentrated. The growth of the nation, therefore, and all our activities are in the hands of a few men. We have come to be one of the worst ruled, one of the most completely controlled and dominated Governments in the civilized world no longer a government by free opinion, no longer a Government by conviction and the vote of the majority, but a Government by the opinion and duress of a small dominate men.” Woodrow Wilson (History of the Federal Reserve, 2013). As you can decipher from President Woodrow Wilson’s quote about the Federal Reserve...
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...Monetary Policy and the Federal Reserve: Current Policy and Conditions Marc Labonte Specialist in Macroeconomic Policy February 9, 2015 Congressional Research Service 7-5700 www.crs.gov RL30354 Monetary Policy and the Federal Reserve: Current Policy and Conditions Summary The Federal Reserve (the Fed) defines monetary policy as its actions to influence the availability and cost of money and credit. Because the expectations of market participants play an important role in determining prices and economic growth, monetary policy can also be defined to include the directives, policies, statements, and actions of the Fed that influence future perceptions. Traditionally, the Fed has implemented monetary policy primarily through open market operations involving the purchase and sale of U.S. Treasury securities. The Fed traditionally conducts open market operations by setting a target for the federal funds rate, the rate at which banks borrow and lend reserves on an overnight basis. Beginning in September 2007, in a series of 10 moves, the federal funds target was reduced from 5.25% to a range of 0% to 0.25% on December 16, 2008, where it has remained since. With the federal funds target at this zero lower bound, the Fed attempted to provide additional stimulus through unconventional policies. It provided forward guidance on its expectations for future rates, announcing that it “anticipates that, even after employment and inflation are near mandate-consistent levels, economic...
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...chapters describing the structure of the Federal Reserve System and the money supply process, we mentioned three policy tools that the Fed can use to manipulate the money supply and interest rates: open market operations, which affect the quantity of reserves and the monetary base; changes in discount lending, which affect the monetary base; and changes in reserve requirements, which affect the money multiplier. Because the Fed’s use of these policy tools has such an important impact on interest rates and economic activity, it is important to understand how the Fed wields them in practice and how relatively useful each tool is. In recent years, the Federal Reserve has increased its focus on the federal funds rate (the interest rate on overnight loans of reserves from one bank to another) as the primary indicator of the stance of monetary policy. Since February 1994, the Fed announces a federal funds rate target at each FOMC meeting, an announcement that is watched closely by market participants because it affects interest rates throughout the economy. Thus, to fully understand how the Fed’s tools are used in the conduct of monetary policy, we must understand not only their effect on the money supply, but their direct effects on the federal funds rate as well. The chapter thus begins with a supply-and-demand analysis of the market for reserves to explain how the Fed’s settings for the three tools of monetary policy determine the federal funds rate. We then go on to look in more...
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...University ECO- 3007-10 Macroeconomics Chapter 15: 1- The Fed Holds Depository Institutions’ Reserves & Provides Payment Clearing Systems- This acts as a regional clearinghouse to exchange or clear checks that have been deposited at one institution but written on another. The Fed settles checks by moving the funds required from a payee to payer institution, (credit union, savings institution or commercial banks). 2- Fed Acts as Government Fiscal Agent- The main services are insurance & redemption of securities on behalf of the Treasury, Federal agencies, other entities and the processing of payments to & from the Federal government. The Treasury & Reserve banks implement new web base technology to improve the Fed government’s provision with services in areas of security & payments, collections with government finance reports. The challenge is to manage complex & rapid information technologies while still being able to maintain high standards of security, efficiency and reliability. 3- Fed Conducts Monetary Policy- This is done by the nation’s central bank (Federal Reserve System) & influences demand mainly by raising & lowering short term interest rates. The Fed conducts monetary policy to fight inflation & promote economic growth. One of the most important tools for the Fed to conduct monetary policy is to open markets operations options to conduct monetary policy. 4- Fed Intervenes in Foreign Currency Markets- This is the most common...
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...money supply, the Fed must make a defensive purchase of bonds on the open market, raising the monetary base to counter the decline in the multiplier. 6. “The only way the Fed can affect the level of borrowed reserves is by adjusting the discount rate.” Is this statement true, false, or uncertain? Explain your answer. This statement is false. The Fed could affect the level of borrowed reserves in two ways. First, they could directly limit the amount of discount loans an individual bank can take out. Second, they could reduce non-borrowed reserves to such a point that even with a fixed discount rate, borrowed reserves will rise, as outlined in the diagram below: In the diagram above, the Fed cuts non-borrowed reserves by making open-market sales of bonds. This causes the federal funds rate to rise above the discount rate, prompting banks to borrow from the Fed. As a result, the total reserves held by banks (R2) will be equal to NBR2 supplied by the Fed and reserved borrowed directly from the Fed (BR). 7. Using the supply and demand analysis of the market for reserves, show what happens to the federal funds rate, holding everything else constant, if the economy is surprisingly strong, leading to an increase in checkable deposits. As checkable deposits increase, banks will have to hold more reserves (for fixed required and excess reserve ratios). The demand for reserves will shift to the right, causing the federal funds rate to increase...
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...The Federal Reserve controls the economy of the United States through a variety of tools. They use these tools to shape the monetary policy of the United States in order to promote economic growth and reduce the rate of inflation and the unemployment rate. By adjusting these tools, the Fed is able to control the amount of money in the supply. By controlling the amount of money, the Fed can affect the macro-economic indicators and steer the economy away from runaway inflation or a recession. The Federal Reserve uses three main tools in order to control the money supply. The first tool is open-market operations. These operations consist of the buying and selling of government bonds to commercial banks and the public. Open-market operations are the most important tool that the Fed can use to influence the money supply (Brue). By buying bonds from the open market, the Federal Reserve increases the reserves of commercial banks which in turn will increase the overall money supply in the country. The opposite is true if the Fed sells bonds on the open market. By doing so, the Fed reduces the reserves of banks and, in turn, takes money out of the system. By being able to control how much money the commercial banks can lend, the Fed has a very powerful tool to adjust the economy. The second tool the Federal Reserve uses is the adjustment of the reserve ratio. The reserve ratio is the ratio of the required reserves the commercial bank must keep to the bank’s own outstanding checkable-deposit...
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...History of the Federal Reserve July 12, 2011 Introduction The monetary system within the United States of America is a complex, intricate system. At the top and in control of this system is the Federal Reserve and its board of governors. The “Fed” has had an interesting history within our country since its creation in 1913. It is the central bank of the United States. It is the third such attempt, and the most successful central bank to be formed in America. The creation of the Fed was initially done to stave off financial panics, but the scope and purview of the Fed has grown over time through the enactment of many laws that give the Fed its power. The main focus of the Fed is to regulate, monitor and control the monetary system within the United States. While the Fed has been in existence in the United States it has not been without critics and proponents. Recently the critics have grown in number thanks to the TARP program in 2008 that provided bailout money to companies deemed too big to fail. While this policy is just many in the long history of the Fed, it has brought much attention to this entity that although sanctioned by the government, actually operates independently with exception to bi-annual reports to Congress. Although the Fed has faced many calls of audits and/or accountability, it has done well in the handling of the nation’s monetary policy through a Great Depression, two World Wars, and countless business cycles of boom and bust...
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