WHY DOING BUSINESS WITH THE U.

S IS THE RIGHT DECISION

THE INSIDE LOOK OF THE FEDERAL RESERVE

The Federal Reserve System, also known as "The Fed," is the central bank of the United States. In December of 1913, the Fed was created by the congress with the objective of provide the nation with a more flexible, safer, and stable monetary and financial system.

As the bank of the federal government, the Fed also has the responsibilities of being the role model as well as the bank to all the financial institutions within the United States.
The Federal Reserve System includes the Board of Governors and the twelve regional Reserve Banks.

WEAK ECONOMY LOW EMPLOYMENT LEVELS

LOW ECONOMY PRODUCTION CAPACITY

HIGH PRICES FLUCTUATION

HIGH FEDERAL FUNDS RATES

The discount rate is the interest rate at which an eligible financial institution may borrow funds directly from a Federal Reserve bank. Some of the factors that influence the fed to adjust the discount rate are: a weak economy, the low employment rates, fluctuation in prices, low economy production of goods and services, and high federal fund rates, which in turn influences inflation and overall interest rates because of the high availability of money.

LOWER DISCOUNT RATES

1. 2. 3.

INCREASE DISCOUNT RATES

1. 2. 3.

BANKS BORROW MORE RESERVES INCREASE IN LOAN OFFERS LOWER INTEREST RATES

BANK RESERVE DECREASE FEWER LOANS OFFERS HIGHER INTEREST RATES

CONTRACTIONARY MONETARY POLICY

HOW DOES MONETARY POLICY AIM TO AVOID INFLATION?

SELLING OF U.S. TREASURY SECURITIES-OPEN MARKET OPERATIONS

INCREASE IN THE DISCOUNT RATE INCREASE IN RESERVE REQUIREMENTS CONTROL MONEY CREATION INCREASE IN GOVERNMENT SPENDING DECREASE IN TAXES

Monetary policies are the regulation and actions the Fed takes to influence financial conditions in order to achieve its goals, which are but not limited to maximize production and employment and stabilize prices, as specified in a 1977 amendment to the Federal Reserve Act.

Influencing inflation takes a long time and has to be looked at as a long-term goal, as a result, the Fed watches economic indicators closely to determine in which the direction the economy is going so it can applies its policies. In the case of forecasting an increase in inflation the, the Fed uses the contractionary monetary policy help to decrease the money supply and raising interest rates. This policy is applied for the purpose of putting the brakes on an overheated business-cycle expansion and to address the problem of inflation.

HOW DOES MONETARY POLICY CONTROL THE MONEY SUPPLY?

WITH MORE MONEY, AGGREGATE EXPENDITURES ARE GREATER LOW INTEREST RATES INVESTMENT EXPENDITURES GOVERNMENT PURCHASES NET EXPORTS CONSUMPTION EXPENDITURES

The money supply is the quantity of money that exists in the economy. It is the function of the Federal government to control the total amount of money circulating within the economy; the Fed control the money supply through its monetary policy. The money supply as an aggregate demand determinant causes changes in aggregate demand and shifts of the aggregate demand curve. In the case that the Fed intent to prevent a recession on the business-cycle horizon, the fed decides to expand the money supply. As a result of the extra money circulating in the economy, the purchasing power of all four sectors household, business, government, and foreign improve.

HOW DOES MONETARY POLICY CONTROL THE MONEY SUPPLY?

WITH LESS MONEY, AGGREGATE EXPENDITURES ARE

LOWER

HIGH INTEREST RATES

INVESTMENT EXPENDITURES DECREASE

GOVERNMENT SPENDING STOPS NET EXPORTS CONSUMPTION EXPENDITURES DECREASE

In the case that Fed is trying to prevent inflation it might decide to reduce the money supply. As a result of the decrease in money circulating about the economy, the purchasing power of all four sectors household, business, government, and foreign is restricted. Fearing the beginning of higher inflation, the Fed might decide to reduce the money supply by applying its contractionary policy. Everyone is willing and able to buy less real production at the existing price level, which decrease consumption expenditures.

POTENTIAL ECONOMIC STIMULUS:

1.

TAX CUTS FOR INDIVIDUALS

2.
3. 4.

TAX CUTS FOR COMPANIES

EXPENDITURES ON PUBLIC WORKS INVESTMENTS IN RESEARCH AND DEVELOPMENT

Most government stimulus are follow by an increase in the money supply to the economy. Some of the different ways of improving the economy are via tax cuts for individual as well for businesses because encourage spending and investments, government spending on public works because it helps by creating contracts for firms and provide employment opportunities, and investment in researches and development to thrive future businesses. This affects the money supply because depending on the goals to achieve the fed increases or tighten the money supply.

WHAT INDICTORS ARE EVIDENT THAT THERE IS TOO MUCH OR TOO LITTLE MONEY WITHIN THE ECONOMY? HOW IS MONETARY POLICY AIMING TO ADJUST THIS?

TOO MUCH MONEY 1. CONSUMER SPENDING INCREASE 2. HIGHER DEMAND FOR PRODUCTS 3. SUPPLY OF PRODUCTS DECREASE 4. PRICES RISE TOO QUICKLY

LITTLE MONEY 1.DECLINE IN PURCHASING 2. LOW DEMAND FOR PRODUCTS 3. LOWER PRICES

Stimulus programs are very helpful to the economy because they help to improve an economy suffering from weak aggregate demand as well as help reduce the risk and severity of a recession. However, too much money into the economy could cause inflation. The concept is that if consumers have a lot of extra cash in their pocket they will be more inclined to buy things. If enough people have extra money demand may exceed supply, and prices will rise. If there is too much money in the economy, however, people spend more money and demand increases at a faster rate than supply can match. Prices rise too quickly because of the shortage of products, and inflation results. By forecasting increases in inflation or slow-downs in the economy, the Fed knows whether to increase or decrease the supply of money (Obringer,2002).

References

Obringer, L.A,. (2002)."How the Fed Works. Retrieved from HowStuffWorks.com. <http://money.howstuffworks.com/fed.htm> 293 January 2012.

Schwartz, A.J. "Money Supply." The Concise Encyclopedia of Economics. 2008. Library of Economics and Liberty. Retrieved January 29, 2012 from the World Wide Web: http://www.econlib.org/library/Enc/MoneySupply.html