The Role of the Federal Reserve in the United States Economy

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In this essay I will discuss the role of the Federal Reserve in the United States economy. In doing this I will look first at open market operations as a tool to influence money supply. Then, I will look at discount rate and federal funds target rate and how the Federal Reserve uses it to influence money supply. Lastly, I will look at required reserve ratio and deposit expansion (money) multiplier as a tool the Federal Reserve uses to influence the money supply. Throughout discussion of these concepts I will give my opinion on how the Federal Reserve might best employ each of these tools given to our certain economic situation which would be to lower money supply to avoid inflation.

The Federal Reserve System, also known as the Fed, is the United States central bank and is responsible for all other banks in the US and for the amount of money we have in the economy. The Fed is run by a board of seven governors that are appointed by the president and then approved by the Senate. The main reason we are concerned about how the Fed's effect the economy is because it has the ability to set the rates for interest and also can effect inflation. It can lower or raise inflation with monetary policy and raise or lower interest rates. Now we will look at how the Fed uses open market operations as a tool to influence the money supply.

Open market operations is when the Fed purchases or sells US bonds. The Fed uses open market operations most often because it is an easy way to effect the money in the economy without having to change any banking regulations or laws. In a single day the Fed can effect the money supply by having the New York branch of the Federal Reserve buy or sell bonds in the US bonds market. The way that the Fed increase...

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...al Reserve in the United States economy. In doing this I looked first at open market operations as a tool to influence money supply. Then, I looked at discount rate and federal funds target rate and how the Federal Reserve uses it to influence money supply. Finally I looked at required reserve ratio and deposit expansion (money) multiplier as a tool the Federal Reserve uses to influence the money supply. Throughout discussion of these concepts I stated my opinion on how the Federal Reserve might best employ each of these tools given to our certain economic situation. In doing this essay I used the book and your comments from the essay to relay my information, plus I went to the website provided for additional information. I actually learned and understood a lot more upon doing this essay than I had from doing the discussions or reading through the material before.

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