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Gregory Mankiw's Brief Principles Of Macroeconomics

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I. Introduction The stock market and bond market are both way to invest money in our economy. There are many things to consider before investing into one of these markets. For instance, what will you earn on your money or how much risk is involved? The Federal Reserve is a major player with money supply and interest rates, but fractional lending by banking institutions leads to the money supply. Even though this is true, the Federal Reserve is the institution that sets the table. The governments "Monetary Policy" is ultimately what leads to the fluctuation in the money supplies and setting the interest rates in this country. In a since, the government controls many aspects of both markets.
II. Main Point First, bonds are low risk whereas the stock market is high risk. There are important characteristics to the bonds market,which include terms, credit risk, and tax treatments (Mankiw 8-1a). One reason the bond market is not as risky as the stock market is, because the bond market is not as vilotile. In the text, "Brief Principles of Macroeconomics," author Gregory Mankiw tells us that "compared to bonds, stock offer the holder both higher risk and …show more content…

I think that the Federal Reserve not only controls the money supply and interest rates, but it is what keeps our country from another depression. They accomplished this feat by using the monetary policy. The monetary policy is used to stablize the economy. The tools the Federal Reserve uses are reserve requirements, discount rates, and open market operations. In a article written by Richard Cloutier, he states that"the reserve ratio is the percentage of reserves a bank is required to hold against deposits" (Investopedia). A decrease in the reserve ratio means that banks will have more money to lend. A increase in the reserve ratio will have the opposite effect. This is one way the Federal Reserve controls the money supply and interest

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To increase reserves the FED buys securities and pays for them by making a deposit to the account maintained by the FED. The FED lower reserves by selling securities and collects from those accounts. These sales and purchases of securities are done under the supervision of the Federal Open Market Committee. The FOMC uses this tool to control the interest rates and money supply in the US economy( www.federalreserveeducation.or g, n.d.). The simplest answer as to why the FOMC tinkers with the sales and purchase are the goal of maintaining a balance or equilibrium in the economy in the US.

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The Federal Reserve is the centralized banking system of the United States. It was designed to provide the US with a safer, more flexible, and more stable monetary and financial system (federalreserve.gov). The Federal Reserve uses various tools such as open market operations, reserve requirement, discount window lending, or quantitative easing when it comes to conducting the monetary policy. Even though some may argue on weather why they believe the Federal Reserve System is or is not beneficial to our economy, the Federal Reserve Act is still one of the most talked about laws concerning the US financial system today.

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The Federal Reserve is both a private and public government institution that is necessary for the country’s economic stability. According to Newsweek, The chairman of the Fed is considered the second most powerful man in the United States with his ability to keep the economy stable on the verge of a financial crisis. The creation of the Fed was due to the Panic of 1907, where a series of stock market speculations caused several large to lose a great deal of money. In order to prevent future speculations, Congress passed the Federal Reserve Act 1913. This act entitled the Fed to manipulate the money supply as needed giving it two powerful jobs: a lender in last resort and to carry out the Monetary policy.

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With its power to stabilize the financial industry and consolidate monetary policy under a single body, the Federal Reserve is a vital component of the US economy. The independence of the Federal Reserve, which spares it from the influence of political demands, is one of the institution's advantages. This independence aids in keeping the Fed from adopting measures that could be advantageous for reelection in the short run but would cause long-term economic harm down the road. In addition, the Federal Reserve's function as a lender of last resort to commercial banks guarantees that banks will always have access to money when they need it and contributes to the stability of the banking system. The Fed has been successful in lending money to banks

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The Federal Reserve runs and manages our economy on a daily basis, including the regulation of tax rates and controlling how much cash have in circulation. In the US economy, “[the]

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The Federal Reserve plays a negative role in the United States. Since the Federal Reserve can operate without Congress or the president's approval, their accountability can be limited. This gives the Federal Reserve a large amount of authority, especially involving money supply. Since they control the money supply of the United States, this makes them a powerful bank in the United States. Their power gives them the ability to control a huge part of the government.

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The Federal Reserve Act of 1913 was an attempt to stabilize the to the fiscal markets, after the Panic of 1907 demonstrated the issues inherent with a system without control. This established twelve regional Federal Reserve Banks with a lot of autonomy and gave them the authority to discount eligible securities from member banks to provide some elasticity to the financial system. During the early years, the Federal Reserve System (FRS) had a limited part in the United States’ economic life. It was not till the Great Depression that things changed for the FRS. The 1935 Banking Act created in Washington D.C., a Board of Governors with more authority over the operations of open market and the discounting of rates for Federal Reserve Banks.

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The Fed’s main desirable goals are low unemployment, economic growth, price stability or low inflation, and financial market stability. The Federal Reserve’s profession is to also encourage a “sound banking system” and a well economy. To reach this goal, the Federal Reserve has to fulfill as “the banker’s bank, government’s bank, and the nation’s money manager” (Investopedia). The Fed also sells and saves the government’s securities, which supplies the country’s paper currency.

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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.

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