ECO 252 How FED controls money supply

Topics: Monetary policy, Central bank, Federal Reserve System Pages: 2 (734 words) Published: February 14, 2015
Jennifer Belcher
ECO 252
The Federal Reserve also known as FED is the central bank of the United States and is responsible for regulating the quantity of money in the country. The Federal Reserve was created by Congress in 1913 to ensure the monetary stability of the economy. One of the initial functions of the FED was to encourage banks to extend new loans. The smaller banks were given the financial support of the central bank to ease their hesitation towards loaning their customers money. As well as financially backing smaller commercial banks, the FED regulates the money supply that is available to our country. The Federal Reserve has been known as a “lender of last resort” to prevent financial panics.

The FED is currently ran by a board of seven governors. The board is chosen by the president of the United States and approved by the Senate. They are elected to fourteen year terms so that they do not get influenced by the political pressure as they create new monetary policy.

The FED can have several different influences on the quantity of reserves that are available, buying and selling bonds and lending to smaller banks. The buying and selling of bonds is also known as open-market operations and is the method most commonly used by the FED to regulate reserves. When the FED wants to increase the money supply it would instruct its bond traders to buy bonds from the public. The money used to purchase the bonds increase the amount of money that is available to the economy through the money that is turned into new currency and the money that is deposited into banks. In contrast if the Fed needs to reduce the amount of money in the reserves it will sell bonds to the public to reduce the amount of currency in circulation. Smaller commercial banks will also borrow from the fed to increase reserve levels. The banks most commonly will borrow from the FED’s discount window and pay the loan back with interest, the rate of interest is known as a...
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