Federal Reserve Paper
September 29, 2014
Federal Reserve Paper
The Federal Reserve System is also known as the central banking system of the United States. The Federal Reserve System is run by the Board of Governors, and is composed of 12 regional banks. The Federal Reserve Bank is independent of political pressure decisions that a government influenced by political pressures cannot make. Adjusting the Discount Rate and Effects on the Interest Rates The discount rate is known as the rate of interest the Federal Reserve System (Fed) charges for loans made to banks. The Federal Reserve (Fed) raises or lowers the interest rate it will cause a domino effect. The Fed raising the interest rates, will cause the banks to raise their prime rate; which affects consumer loans, mortgages, auto loans, and business loans. The banks can go to the Fed (central bank) to take loans and borrow money when they are short on reserves. The Fed can increase or decrease the interest rate of the loans to banks. Increasing the interest rate makes it more expensive for banks to borrow money, and discourages banks from borrowing money, and instead contracts the money supply. A decrease in the rate encourages banks to borrow money and increase the money supply. Banks with excess reserves can lend their money overnight to another bank that has a shortage of reserves. The money goes electronically and the in the morning the money is returned including the interest for the day based on the annual percentage rate. Monetary Policy Avoid Inflation
The monetary policy influences the economy through changes in the banking systems reserves that influence the money supply, credit availability, and interest rates (Colander, 2013, pg. 670). Inflation is the continual rise in the price level. Monetary policy has an important influence on inflation. When the federal funds rate is reduced, the resulting stronger demands for goods and services tend to push wages and other costs higher ("How Does Monetary Policy Influence Inflation and Employment?” 2014). The policy actions can influence expectations about how the economy will perform in the future. Monetary Policy Control Money Supply
The Federal Reserve policy is the most important determinant of the money supply. If money supply rises, the price level will also rise; yet if the money supply drops so will the price levels. Money supply in the US is comprised of currency in dollar bills and coins issued by the Federal Reserve System and US Treasury. Money is used in all economic transactions, it has a powerful effect. “An increase in the supply of money works both through lowering interest rates, which spurs investment, and through putting more money in the hands of consumers, making them feel wealthier, and thus stimulating spending” (Schwartz, 2008). Stimulus Program Affect the Money Supply
The stimulus package includes spending increases, tax decreases, and large infusions of money in the economy (Colander, 2013, pg. 526). Applying the stimulus program helps to jumpstart the economy and prevents a depression. The stimulus package is used in the United States to recover from a collapse, and increase employment and recovery in the economy. The United States is not the only country to use a stimulus package, but so has India for the first time in 2008. The steps taken were to ensure the safety of bank deposits and stability of financial systems. These measures were taken by the government to counter the impact of global recession and stimulate the Indian economy ("Definition of 'Stimulus Package' ", 2014). Indicators of too Little Money in the Economy
The amount of money floating around in the economy and is available for spending is the money supply. Money is in different subsets based on liquidity, physical cash (dollar value and coin), and deposits and savings accounts. When there is little money in the economy there is little economic growth as people...
References: Colander, D. C. (2013). Economics [University of Phoenix Custom Edition eBook]. New York,
NY: McGraw-Hill/Irwin. Retrieved from University of Phoenix, ECO372 website.
Definition of 'Stimulus Package”. (2014). Retrieved from
How does monetary policy influence inflation and employment (2014). Retrieved from
Schwartz, A. J. (2008). Money Supply. Retrieved from
What is the difference between monetary policy and fiscal policy, and how are they
related?. (2014). Retrieved from http://www.federalreserve.gov/faqs/money_12855.htm
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