Federal Reserve Eco 372

Topics: Monetary policy, Federal Reserve System, Central bank Pages: 2 (699 words) Published: November 19, 2012
Economic strategy can overwhelm some, but one who understands the idea of how money can stimulate or dissolve the economic market obtains an understanding of the Federal Reserve. The Federal Reserve is a bank in which other banks loan and call upon when in need. The Federal Reserve Bank ensures all funds in Community and other federally accredited banks, also known as FDIC. Even though the Federal Reserve is a bank it is impacts the economic growth or decline in ways of monetary policy and stimulation or dissolve. The Federal Reserve Bank uses a tactic known as discount rate, which is the term used for the interest charged for loans by banks. When the discount rate is low, banks can increase the amount of loans offered, as well as lower the interest rate in their location. When the discount rate is high, banks will decrease the number of loans and raise the interest rates they charge. The Federal Reserve can use the power of the discount rate to increase or decrease the amount of money in circulation. Banks may even need to “share” the excess or surplus of funds in their reserves with another bank; this is known as Fed Funds. These funds carry an interest rate as well. The interest rate may be higher or lower depending on the Federal Reserve. The higher the interest rate the more likely a bank is wanting to loan to another bank. If it is lower the desire will be undesirable. The Discount and Fed Funds rate correspond, the Discount rate is normally set slightly below the Fed Funds rate in effort to increase the money in circulation. When the discount rate is above the Fed Fund rates then the money in circulation is decreased. The Federal Reserve Bank is located in each region to allow for an even distribution among the United States. Each of the Reserve Banks are governed by the Federal Reserve System’s Board of Governors who have been nominated by the President and confirmed by the Senate. The Chairman and Vice Chairman of the Board are then appointed by the...
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