How the Federal Reserve Can Help the Recession

Topics: Monetary policy, Federal Reserve System, Central bank Pages: 3 (1063 words) Published: June 10, 2013
How the Federal Reserve Can Help the Recession

Principles of Macroeconomics

How the Federal Reserve Can Help the Recession
The economy is one of the most important factors that affects every person and all the organizations in the United States. Since the 1970s, the United States has suffered four recessions and two high inflations. Some people feel that less involvement from the government will decrease bad performance and possibly the economy would be better off. Others individuals feel that the government should be more involved to prevent serious issues such as the current recession. If the Federal Reserve (Fed) was keeping a careful eye on the commercials banks and the major corporations such as American International Group, perhaps some of these current issues could have been avoided. One of the most important things to keep in mind is to forget the “what ifs” and to focus on the process of economic growth. The Fed has three important tools that can potentially influence the economy out of a recession. This paper will talk about these three tools: the power to change the discount rate, reserve ratio, and dealing with open market operations.

The Federal Reserve System is the United States’ central bank. Americans can not open an account with the Fed. American can open bank accounts with Bank of America, Citizens Bank, and Bank United which are known as commercial banks. These commercial banks have an account with the Federal Reserve Bank and the opportunity to take out loans with the Federal Reserve Bank. Some commercial banks are hesitated to take out loans from the Federal Reserve Banks because of the high discount rate. This fear makes commercial banks more inclined to take out loans from the private market. In the past, the Fed would use moral suasion to discourage commercial banks from borrowing too much from the Federal Reserve Bank. Now times are different and since January 9, 2003, “the Fed announced a new...

References: Case, K.E., Fair, R.C., and Oster, S.E. (2009). Principles of Macroeconomics. (9th ed). Upper Saddle River, New Jersey: Pearson Prentice Hall.
Moffatt, M. (n.d.). A beginner 's guide to the reserve ratio. Retrieved from http://economics.about.com/cs/money/a/reserve_ratio.htm
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