Federal Reserve Paper

Topics: Monetary policy, Federal Reserve System, Central bank Pages: 2 (704 words) Published: February 19, 2014


Federal Reserve Paper

Federal Reserve Paper
The purpose of this paper is to evaluate the Federal Reserves’ discount rate, monetary policy, and stimulus program through the money multiplier. What are the factors that would influence the Federal Reserve in adjusting the discount rate? According to Chron if prices rise too fast or the economy starts slowing down, the Federal Reserve uses the discount rate as a way of manipulating interest rates to stabilize the economy. This change can either increase or decrease how much you'll pay to borrow money. How does the discount rate affect the decisions of banks in setting their specific interest rates? According to Chron although changes in the discount rate affect your interest rate, the Federal Reserve does not lend directly to business owners. Rather, the Federal Reserve lends money to depository institutions such as commercial banks. Depository institutions must pay interest on the money they borrow from the Federal Reserve. The discount rate is the interest rate the Federal Reserve charges its depository institution borrowers. Loan interest rates fluctuate in response as depository institutions pass the discount rate changes along to you. How does monetary policy aim to avoid inflation?

According to Tutor2u monetary policies tend to invest in various assets, in order to avoid the losses caused by inflation. Increase in interest rates is also another measure, in order to contract the real money supply. Monetary policy controls money supply by increasing the discount rate, and also through increasing and decreasing the reserve requirements of lending banks. If the reserve requirements decrease, the banks can lend more money to consumers and businesses. If the reserve requirements increase, banks have to keep more money in with the fed. The interest rates increase, and people have an incentive to save and earn interest from the bank. If the interest rates decrease, then people do not have an...

References: Bartlett, B. (2009). Forbes: Does Stimulus Stimulate? Retrieved from http://www.forbes.com/2009/01/22/stimulus-keynes-taxes-oped-cx_bb_0123bartlett.html
Rogers, K. (2014). What are the factors that would influence the Federal Reserve in adjusting the discount rate? Retrieved from http://smallbusiness.chron.com/factors-would-influence-federal-reserve-adjustin-discount-rate-76835.html
tutor2u. (2013). Economics policies to control inflation. Retrieved from http://tutor2u.net/economics/content/topics/inflation/controlling-inflation.htm
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