INTRODUCTION
The textbook we are using explain that any country’s money supply is made up of cash in circulation and reserves which together make up that country’s monetary base (Wright & Quadrini, 2009). The authors further explain that one of the functions of the reserve bank is to control money supply in a country. The bank also serves as a bank for commercial banks and other depository institutions.
In a bid to control a country’s economy in terms of level of employment and production, the reserve bank (the Federal Reserve Bank in case of the US) uses three monetary policy tools, namely; bank rate, cash reserve ratio and open market operations (Singh, J., 2016).
THE MONETARY TOOLS AVAILABLE TO THE FEDERAL RESERVE THAT IT USES MOST OFTEN AND WHY
According to Wright & Quadrini (2009), the Federal Reserve most often use the open market operations as
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The banks also deposit some funds with the Federal Reserve. However, the banks usually keep excess reserve within their custody so that they can meet other needs such as restocking ATMs and clearing overnight checks (Wright).
The commercial banks borrow reserves from each other through a market that is controlled by the Fed called federal funds market (Federal Reserve Bank of San Francisco, 2016). The Fed facilitates the trade of reserves through an open market for reserves called the federal funds market. The Fed either buys or sell government securities in the open operations market to either lower of increase the funds rate. For instance, the Federal Reserve may buy the government securities in order to lower the funds rate (Federal Reserve Bank of San Francisco).
The Fed uses the open market operations (OMO) method because it cannot directly influence macroeconomic activities such as employment and production. So, it uses the OMO to either increase or decrease money supply in the
The financial crisis of 2007–2008 is considered by many economists the worst financial crisis since the Great Depression of the 1930s. This crisis resulted in the threat of total collapse of large financial institutions, the bailout of banks by national governments, and downturns in stock markets around the world. The crisis led to a series of events including: the 2008–2012 global recessions and the European sovereign-debt crisis. The reasons of this financial crisis are argued by economists. The performance of the Federal Reserve becomes a focal point in this argument.
Monetary Policy is another policy used in Keynesianism which is a list of protocols designed to regulate the economy by setting the amount of money that is in circulation and controlled interest levels. The Federal Reserve system, also known as the central banking system in the U.S., which holds control of this policy. Monetary policy has three tools used by the Federal Reserve to enforce this policy. Reserve Requirement is the first tool that determines the lowest amount of money a bank must possess and is not able to lend out. The second way to enforce monetary policy is by using the discount rate or the interest rate a bank will charge.
Before we begin our investigation, it is imperative that we understand the historical role of the central bank in the United States. Examining the traditional motives of this institution over time will help the reader observe a direct correlation between it and its ability to manipulate an economy. To start, I will examine one of its central policies...
The Federal Reserve uses two other types of tools besides the open market operations (OMO), and they are the discount rates and reserve requirements. The FOMC is responsible for the OMO and the discount rate and reserve requirements are taken care by the Federal Reserve System’s Board of Governors. The three fundamental tools can influenced the demand and supply of and the balances that depository institution hold which can result in the change in federal funds rate.
The Federal Reserve The Federal Reserve uses three main tools in order to control the money supply. The first tool is open market operations. These operations consist of the buying and selling of government bonds to commercial banks and the public. Open-market operations are the most important tool that the Fed can use to influence the money supply (Brue, 2004, p. 252).
It acts as a fiscal agent for the United States government and is custodian of the reserve accounts of commercial banks, makes loans to commercial banks, and is authorized to issue Federal Reserve notes that constitute the entire supply of paper currency of the country. Created by the Federal Reserve Act of 1913, it is comprised of 12 Federal Reserve banks, the Federal Open Market Committee, and the Federal Advisory Council, and since 1976, a Consumer Advisory Council which includes several thousand member banks. The Board of Governors of the Federal Reserve System determines the reserve requirements of the member banks within statutory limits, reviews and determines the discount rates established pursuant to the Federal Reserve Act to serve the public interest; it is governed by a board of nine directors, six of whom are elected by the member banks and three of whom are appointed by the Board of Governors of the Federal Reserve System. The Federal Reserve banks are located in Boston, New York, Philadelphia, Chicago, San Francisco, Cleveland, Richmond, Atlanta, Saint Louis, Minneapolis, Kansas City and Dallas. The Federal Open Market Committee, consisting of the seven members of the Board of Governors and five members elected by the Federal Reserve banks, is responsible for the determination of Federal Reserve Bank policy in the purchase and sale of securities on the open market.
In the following paper, I will summarize an article about the Federal Reserve (The Fed). The article goes into some of the details as to why the Federal Reserve was develop in 1913 during the Depression, how it helps banks that are in trouble, and how important it is to keep the country’s economy running (Marotta, 2014).
“[…] it is desirable to establish a central bank in Canada to regulate credit and currency in the best interests of the economic life of the nation, to control and protect the external value of the national monetary unit and to mitigate by its influence fluctuations in the general level of production, trade, p...
Another problem prior to the establishment of the Federal Reserve System was the inelasticity of bank credit and the supply of money. Small banks placed their excess reserves in large central reserve banks. Whenever a bank’s depositors wanted their funds, the smaller banks would be covered by the central banks. The system worked well during normal conditions. Some banks would draw down on their reserves as other banks would be building up their reserves. In times of excessive demand, however, the problem became quite serious. When the public wanted large amounts of currency, the
It’s mandatory for all the banks to deposit a certain determined percentage of their assets with the central bank to make sure that the banks’ customer deposits are safe. These percentages are what the central bank adjusts to reduce or increase the banking lending ...
The first major aspect of the monetary policy by the Federal Reserve is its interest rate policy. This interest rate policy is mainly determined by the figure for the federal funds rate, which is the rate at which commercial banks with balances held within the Federal Reserve can borrow from each other overnight in ord...
1. Which of the monetary tools available to the Federal Reserve is most often used? Why?
The Federal Reserve use several tools like discount rate, federal funds rate, required reserve ratio and open market operations to control the money supply. In the simulation, the effect of controlling the money supply on the economy was presented. Typically, releasing money into the system results in higher Real GDP and lower unemployment. On the other hand, it also raises inflation.
The International Monetary Fund and the World Bank were created as a result of the Bretton Woods Conference. Both provide assistance to countries suffering economically. While the IMF is a cooperative institution that aims to create an organized global system of payments and receipts, the World Bank is an institution that aims to help developing countries (Driscoll 1). Both play a part in the economies of struggling nations with the goal of reducing their burden and helping them to survive in the global economic system. Unfortunately, in many cases their practices within developing nations have been seen to create more harm than good. This is possibly because both institutions use a one size fits all approach when aiding countries rather than gaining a deep understanding of each country they are involved in and catering their approach as a result. In this paper I will examine the practices of the IMF and World Bank in developing nations that have led to failure and the effects the policies had on these countries.
“If you owe your bank a hundred pounds, you have a problem; but if you owe it a million, it has.(1)”