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Federal Reserve Essay

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On December 23rd, 1913, President Woodrow Wilson signed the Federal Reserve act. This act created the Federal Reserve, which is a central bank of the United States. It has a Federal Reserve Board in Washington D.C. along with twelve regional banks located all across the country. The Federal Reserve has two main jobs. One job is to regulate all banks in the United States and ensure the health of the banking system overall. It also acts as a bank for banks, making loans to banks in need. The second, and arguably the most important, job of the Federal Reserve is to manage the total amount of money in the economy, more commonly known as the money supply. How does the Federal Reserve manage all of this money however? They do this by altering the …show more content…

Open-market operations are more commonly used to manage the money supply as they have more freedom. They can change the money supply by very small or very large amounts whenever they want without having to worry about severe changes in any sort of bank regulations or laws.

Open-market operations are where the Fed either buys or sells government bonds. For example, if the Federal Reserve wants to increase the money supply, it will purchase public bonds from the national bond market. The money that the Federal Reserve uses to purchase these bonds, increase the amount of money in the economy. Every physical dollar that goes into the economy increases the total supply by one dollar. However, if a dollar is deposited in a bank, it would count as more than one dollar due to the fact that it increases the bank’s reserves, which would increase the amount of money that the bank can create.

If the Federal Reserve wanted to decrease the money supply, it would sell government bonds to the public. The public would have to pay for the bond with their physical currency and bank deposits. People withdraw money from the banks which then decreases the amount of money that the bank can lend. Since the Fed now holds that money, the amount of money in the economy …show more content…

This is done by lending reserves to banks when the banks need more for their own reserves. Typically, banks borrow from the Federal Reserve and pay an interest rate on the money that they borrowed which is defined as a discount rate. The Fed can use the discount rate to their advantage if they want to increase or decrease the supply of money in the economy. They increase the discount rate when they want banks to borrow less, which would deter the banks from seeking a loan and thus the money supply decreases. If the Fed wants to add more to the money supply, they would lower the discount rate. This makes the banks take out more loans which then increases the money supply.

Banks can also borrow money from the Federal Reserve by going through something called the Term Auction Facility which is essentially an auction. The Fed sets a certain amount of money aside to be loaned out and banks bid on it. The highest bidder gets the

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