Federal Reserve

Topics: Monetary policy, Economics, Money supply Pages: 3 (656 words) Published: May 22, 2013
Federal Reserve Paper

Federal Reserve Paper by LeAnn Bomar
University of Phoenix
Eco/372 Principles of Macroeconomics
May 16, 2013

I have been asked to prepare this essay to familiarize foreign officials with The United States Federal Reserve. As parties interested in doing business in our country, I understand how important it is for you to inform yourselves on the Federal Reserve and how it operates. In this paper, there will be information pertaining to the federal fund rate, monetary policy, stimulus program, and the current state of money in this economy.

First, I will explain the federal funds rate. The federal funds rate is the interest rate at which banks loan money to each other. Banks are required, by law, to keep a certain amount of customer money on reserve. Banks try to stay as close to the reserve amount as possible, without going under, and borrow money from each other to maintain the limit. The federal funds rate affects how the banks decide on interest rates because it is used to control the supply of available funds. Raising the rate makes it more expensive to borrow and lowers the supply of available money. Lowering the rate makes it less expensive to borrow money increases the supply of available money ("Bankrate.com", 2013).

According to "What Is Being Done To Control Inflation?" (2013), the primary job of the Federal Reserve is to control inflation while avoiding a recession. It does this with monetary policy. Monetary policies are used to either stimulate or discourage consumer spending in an effort to stabilize the economy after booms or recessions. To avoid inflation, the Federal Reserve implements contractionary monetary policy, this slows economic growth. This is typically done by raising the federal funds rate, making it more expensive for banks to lend each other money, thus decreasing the money supply in circulation.

According to "Investopedia Stimulus Package" (2013),...

References: Bankrate.com. (2013). Retrieved from http://www.bankrate.com/rates/interest-rates/federal-funds-rate.aspx
Investopedia Stimulus Package. (2013). Retrieved from http://www.investopedia.com/terms/s/stimulus-package.asp
What Is Being Done to Control Inflation?. (2013). Retrieved from http://useconomy.about.com/od/inflationfaq/f/Control_Infla.htm[pic]
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