federal reserve

Topics: Monetary policy, Federal Reserve System, Money supply Pages: 6 (810 words) Published: December 6, 2014

Ways Supply and Demand Impact The U.S. Federal Reserve
By: Cole Stephen
Macroeconomics Principle’s
Dr. Steven Syrmopoulos

The Federal Reserve System has been put in place by our government to provide a safe, flexible, and stable financial system. It uses the economic theory of supply and demand to achieve its objectives, which basically are to make our country as financially successful as possible. It uses different monetary policies to try and achieve their objectives. They are the expansionary monetary policy, the contractionary monetary policy, and the quantitative easing monetary policy. Institutional

The U.S. Federal Reserve, more properly known as The Federal Reserve System, was created in 1913 when President Wilson signed the Federal Reserve Act, and is the central bank in the United States. It was created by our government so we the people of the United States could have a safe, flexible, and stable financial system. The Federal Reserve’s actions are based upon the the economic theory of supply and demand. The four main objectives of our central bank are to 1.) Conduct our monetary policy by influencing money and credit conditions in the economy in pursuit of full employment and stable prices; 2.) Supervise and regulate banks and other important financial institutions to ensure the safety and soundness of the nation’s banking and financial system and to protect the credit rights of consumers; 3.) Maintain the stability of the financial system by containing systemic risk that may arise in financial markets and; 4.) Providing certain financial services to the U.S. government, U.S. financial institutions, foreign official institutions and playing a major role in operating and overseeing the nation’s payments systems. (Board of Governors of the Federal Reserve System, 2014)

In objective 1 and objective 2, the Federal Reserve System use’s the economic theory of supply and demand to create the type of environment it needs to achieve its objectives. A monetary policy can be described as something that the Federal Reserve can control, like the money supply. It is considered expansionary policy if it increases the money supply or decreases the interest rate in the market. Opposite of expansionary policy, it is considered contractionary policy if it reduces the money supply in the market. When the central bank is trying to boost the economy, it will be taking the approach of the expansionary policy, which means they are pushing money into the market, or that they are increasing the supply of cash. What their intentions are, is to start some sort of cash flow, and with the extra money in the market it frees people up financially and allows them to spend more. If the Feds think the economy is growing at a pace that is out of control, they would use the contractionary monetary policy, which means they would take some of the money back and put it in to their reserve, causing people to slow down with their spending because there is a shortage on the supply of money. (Keefe)

Quantitative easing is another type of monetary policy. Quantitative easing is something that the Federal Reserve does when short-term interest rates are approaching zero. This method is carried out when the central bank lowers its interest rates. (Quantitative Easing Definition) When the central banks lower their interest rates, their hopes are that other banks will borrow more money from the federal reserve. With the other banks having more money on hand, it is hoped that the interest rates being charged by the non-central banks to the consumers are lower, which in turn encourages the consumers to make larger purchases because they are able to take loans out of their banks with lower interest rates. Which in the end increases the overall cash-flow in our country, strengthening our economy. Interpersonal

The Federal Reserve impacts all of our lives. The Federal Reserve is a lot like Batman. It is the humble,...

References: Current FAQsInforming the public about the Federal Reserve. (2014, February 4). Retrieved November 27, 2014, from http://www.federalreserve.gov/faqs/about_12594.htm
Keefe, T. (n.d.). How Much Influence Does The Fed Have? Retrieved November 27, 2014, from http://www.investopedia.com/articles/stocks/08/monetary-policy.asp
Quantitative Easing Definition | Investopedia. (n.d.). Retrieved November 27, 2014, from http://www.investopedia.com/terms/q/quantitative-easing.asp
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