Questions And Answers To The Federal Reserve

1. Which of the monetary tools available to the Federal Reserve is most often used? Why?

1. The Federal Reserve System is a conglomerate of American private banks charged with accumulating and disposing of all the monetary funds of the United States financial system. The Federal Reserve is the institution in charge of issuing money, setting interest rates, that is, the price established for issuing money.

He currently prints money through the fiduciary pattern, which means that the issue is not backed by gold, but its price is set discretionally by the monetary authority of the Federal Reserve.

The Federal Reserve is supervised by Congress. And its activity and they are reviewed in the House of Representatives.

The most important tool used

For example, if the federal reserve plans to contain inflation through a rise in interest rates, it may order a bank to allocate a large number of reserves in the form of loans to the Federal Reserve, which will cause the amount of money to be lent of said bank decreases and the credits are less accessible.

The function of the Central American Bank is to establish discount rates to regulate the money supply. The discount rate is the differential interest that the Reserve charges to private banks for lending them capital.

2. Describe how expansionary activities conducted by the Federal Reserve impact credit availability, the money supply, interest rates, and security

When the Federal Reserve purchases securities in the open market, the reserve accounts of the banks increase The effect of an expansionary fiscal policy on the level of income would be much greater if the Central Bank adopts an expansionary monetary policy, When the Federal Reserve lowers the rate discount, this causes a decrease in interest rates in the economy. With an expansive monetary policy, the interest rate falls as the money supply increases, which stimulates spending and therefore increases the level of total income. A higher level of income means higher imports and therefore a trade deficit. an increase in reserves results in an increase in bank deposits and assets. An immediate effect of this is that interest rates fall and security prices rise. The lower interest rates encourage indebtedness. However, a high mobility of capital means that there will be an outflow of capital due to the low-interest rate.

All countries have some degree of capital mobility in practice. Developing countries generally have less developed financial systems, and as a result, interest rates may not respond freely to an expansive fiscal policy.

3. Suppose the Federal Reserve purchases $ 10 billion worth of foreign currency in exchange for deposit accounts at the Federal Reserve. Show the changes that result