ECO 100 Role of the Federal Reserve Bank Discussion Paper.

ECO 100 Role of the Federal Reserve Bank Discussion Paper.

The Federal Reserve Bank (the “Fed”) is the central bank of the United States. One of its jobs is to manage the money supply. Sometimes it increases the money supply.Sometimes it decreases the money supply.ECO 100 Role of the Federal Reserve Bank Discussion Paper.

Reply to these questions in your post:

  • Name at least one action that the Fed could take to reduce the money supply and raise interest rates.
  • Given our current economy, would you recommend that the Fed reduce the money supply and raise interest rates,or expand the money supply and lower interest rates?Please explain.

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Discuss with a classmate:

  • Reply to a classmate and discuss whether his or her response is similar to yours.

For more information, see my video on the Role of the Fed:

Click here to watch the

 

 

What is the FED’s job and how does the FED manage the money supply? How do banks create money? Let’s explore these questions as we talk about the role of the Federal Reserve Bank, also known as the FED.

Reply to these questions in your post:

  • If the FED decides to continue the process of raising interest rates, what is the likely response of firms and households to the increased cost of borrowing?
  • Thinking back to the discussion on the deficit and the debt, how might an increase in the interest rate affect a decision by the government to allow continued large deficits?ECO 100 Role of the Federal Reserve Bank Discussion Paper.

 

 

The Federal Reserve System or “The Fed” is the U.S.A central bank. Central banks are organizations in control of conducting monetary policy and safeguarding a nation’s financial system. The Fed is responsible for making decisions about the money supply; they decide whether to raise or lower interest rates, which would influence macroeconomic policy. They are also responsible for regulating all or part of the nation’s banking system.

 

Banks create money by deposits customers make. They then take the customers deposits and then lend it out. By law in the U.S.A holds a required reserve of 10%. The other 90% which is the excess reserves, can be loan out. Banks essentially holds a portion of every deposit and loans the rest; by doing so, banks create new money, which is the concept of Fractional Reserve banking.

 

If the FED continue to increase the interest rates investment expenditure and consumption, have a tendency to fall. Firms that invest in different business enterprise will reduce the amount of investment they do, and households will decrease the use of entities that are affected by interest rates, such as housing, education, and car loans. Rises in interest rates will cause national investment rates to fall, and the deficit will increase.

If interest rates increase, I’d expect firms, and households to move different. I’d expect for less money to be borrowed because it would create more of a hassle. It’s like setting yourself up for failure. For businesses, it would create extra debt. For households, families would end up paying almost double of what they borrowed. That can cause a stressful situation for a household because they’ll basically be paying their loan off forever. I also feel as though the deficit rate will always increase over time. It’s a part of growth. However, if interest rates rise at the same time, that can cause people to really struggle and grow less. It could also cause businesses to fail. It would be harder to maintain the business and pay back high interest loans. Businesses would go into debt and families would struggle to survive. It could lead to great failure of the economy.ECO 100 Role of the Federal Reserve Bank Discussion Paper.

 

 

Hello Jeselynn,

 

Good post! Increases in interest rates will make consumers to second guess spending and investing. It’s interesting that you say deficit rate will always increase over time as it’s a part of growth; I feel like no matter whether the interest rates are high or low the deficit will always continue to grow. Many houses hold struggle every day and live pay check to pay check, finds themselves in tough situations. Like the saying goes, sometimes you have to rob Peter to pay Paul.”ECO 100 Role of the Federal Reserve Bank Discussion Paper.

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