Federal Reserve System Research Paper

The Federal Reserve System is the central bank which regulates and controls the monetary and banking system. Their primary focus is to regulate the health of the economy as a whole and implements monetary policy to help increase the money supply during a downturn, and restrict the money supply during periods of excessive growth. During periods when the economy faces high inflation, federal reserve will use contractionary monetary policy by decreasing money supply which in turn results in higher interest rates, lower investment spending, and lower consumer spending. In contrast, when the economy encounters a recession, federal reserve will utilize expansionary monetary policy by cutting interest rates or increasing the money supply to boost economic activity. During expansionary monetary policy, higher investment spending will raise income and higher consumer spending will help the economy. A tight (contractionary) monetary policy occurs when Federal reserve (central bank) raises the

This will have a bad effect on homeowners with a mortgage and small business owners due to the increase in interest rates and decreased money supply in the market. The interest rate is determined by the interaction of the demand and supply of loanable funds market. “Increases in demand will increase both the interest rate and the total amount of borrowing and lending. Decreases in demand will decrease both the interest rate and the total amount of borrowing and lending. Increases in supply will decrease the interest rate and increase the total amount of borrowing and lending. Decreases in supply will increase the interest rate and decrease the total amount of borrowing and lending”(Macroeconomics Bus 302 Lab concept 4). Therefore, when the federal reserve tightens the monetary policy, the housing mortgage supply will decrease and as a result interest rates go