Monetary Policy in The United States
The Federal Reserve Bank (Fed) system was founded in 1913 to prevent the drying up of credit and money supply during economic downturns (Hall, 2022). The Fed utilizes four instruments to manage the money supply: “(1) the establishment of reserve requirements for banks, (2) buying and selling U.S. government securities and other financial assets in the open market, (3) the volume of loans made to banks and other institutions, and (4) the use of interest rates on loans made to banks and other institutions” and (4) the interest rate on reserves it pays banks (Gwartney, Stroup, Sobel, & Macpherson, 2018). Loans from financial institutions determine whether the money supply is restricted or increased. When the reserve requirement ratio is low, banks make loans, which helps the money supply to grow. When the reserve requirement is high, banks often cut back on their investments and loans, which in turn causes the money supply to fall.
Banks can generate new money by holding back a portion of deposits and lending out excess funds (Coppola, 2022). The reserve ratio, which must be maintained against checkable transaction deposits, determines a component of the percentage of reserves (Gwartney et al., 2018). The reserve percentage should determine the amount to be held; the bank uses the surplus reserves to make loans accessible to create money.
The Fed’s operations have advantages and disadvantages, but they have helped stabilize a well-functioning economy in the United States. A benefit is that the Fed developed a single currency for the nation, which has aided in the efficient operation of the economy. The Fed has ensured a sound financial system and created a single currency by implementing monetary policies that affect the economy’s credit and money conditions to promote stable prices and full employment (Lombardo, 2017). The Fed-related scam of manipulating the
U.S. economy by determining the country’s interest rates, which have the potential to rise or fall and either help or impede economic growth (Lomabardo, 2017). Another drawback is that the Fed is frequently depicted as favoring individual interests over those of the general public’s idea that special interests and lobbying organizations influence the Fed to favor individuals over society, taking advantage of the welfare of the general public (Lomabardo, 2017). Under the Bush administration, as in the 2000s, a seven-member board committee governed the country’s economy through open market operations motivated by political interest (Forbes, 2018).
The Federal Reserve Bank allows for the regulation of the money supply and the implementation of monetary policy; thus, the United States must have one. The claim is that the Fed favors advocacy organizations and business interests. The Fed likewise needs to be audited (Lombardo, 2017). The president’s appointment of board members may benefit the executive branch rather than using political power for the benefit of the public. For transparency, the general public should choose or elect board members.
Coppola, F. (2022, April 14). How bank lending really creates money, and why the magic money tree is not cost-free. Forbes. https://www.forbes.com/sites/francescoppola/2017/10/31/how-bank-lending-really- creates-money-and-why-the-magic-money-tree-is-not-cost-free/?sh=1f3b070e3073
Forbes, S. (2018, April 30). New Fed Head Same Old, Bad Old. Forbes, p. 13.
Gwartney, J. A., Stroup, R. L., Sobel, R. L., & Macpherson, D. A. (2018). Macroeconomics: Private and public choice (16th ed.). Retrieved from https://www.cengage.com
Hall, M. (2022, April 20). How the Federal Reserve manages money supply. Investopedia.
Lombardo, C. (2017, January 14). Pros and cons of Federal Reserve. Vision Launch Media. https://visionlaunch.com/pros-and-cons-of-federal-reserve/
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Prior to beginning work on this discussion,
Read Chapter 13 of Macroeconomics: Private and Public Choice.
Monetary policy is largely determined by the Federal Reserve Bank (Fed) in the United States. For this discussion, let’s cordially debate the necessity of the Fed.
For your initial post, address the following:
- How does the Fed control the money supply? Be sure to explain how they can expand or restrict the money supply.
- How does the banking system create money?
- List two to three pros and cons of the Federal Reserve Bank.
- What is your conclusion: is the Fed necessary? Support your opinion.
Your initial response should be a minimum of 200 words. Graduate school students learn to assess the perspectives of several scholars. Support your response with at least one scholarly and/or credible resource in addition to the text.
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