The Federal Reserve, or the Fed, is the agency responsible for regulating the quantity of money in the US economy and for ensuring the health of the banking system (Mankiw, p. 634). The Fed's functions are comparable to the functions of a central bank, such as the Bank of England or the European Central Bank…
It also acts as the bank's bank, meaning that the Fed is the lender of last resort to banks that need to borrow money to maintain stability. Fed's second and most important task is to control money supply. A special committee at the Fed Reserve - the Federal Open Market Committee - directs the US monetary policy.
Natural disasters cause inflation. This is so, because natural disasters, such as hurricanes or earthquakes cause losses that reduce real variables, such as physical products or property. This increases the demand for these variables, because people need to restore the physical losses. Higher demand and decreased output has the effect of increasing price levels and people have to pay more dollars the same quantity of goods and services.
For example, after Hurricane Katrina, and Hurricane Rita energy prices increased significantly (Olson, 2005), because of limited supply and increased demand for gas and petroleum products. Higher gasoline, natural gas and petroleum products prices led to increased costs of other goods and services, such as transportation and building materials. Higher price levels reflected in a higher inflation rate.
The Fed is run by a Board of seven governors appointed by the President and confirmed by the Senate (p. 634). Each of the governors has a 14-year long term which gives them greater independence from political pressures in directing US monetary policy. The key person in the board, and probably the second most powerful person in US (p. 635), is the Chairman who has a four-year term. The Chairman manages the staff of the Federal Reserve, presides over board meetings, and is responsible for Fed's policy in front of congressional committees.
Since January 1, 2006 the new Chairman of the Board of Governors is Dr. Ben Bernanke, a successor to Alan Greenspan (Federal Reserve).
4. Do voters have a say in the implementation of monetary policy
The Fed's control over money supply is indirect (p. 639), because all of its actions are reflected in the banking system. Banks and voters play an important role in the monetary system, because peoples' checking accounts are held in banks and thus influence the money supply. The Fed does not control the amount of money people and households choose to hold as deposits in their banks (p. 640). When households have trust in the banking system, they hold more money as bank deposits, banks have more reserves, hence the banking system can create more money and vice versa.
People's expectations about the future also affect the implementation of the monetary policy. For example high inflation expectations may reflect lower level of public confidence in policy makers (Piger, 2005). If the public believes policy makers are not credible in their goals, it will have higher inflation expectations for the future. These expectations are likely to affect present behavior and are expected to actually impact inflation rates.
5. How is inflation measured
The increase of the overall price level is called inflation (p. 645). One way of measuring inflation is by indexes that reflect changes in price levels over time. One measure of the price level is the Consumer Price Index (CPI), which measures the ...
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“Federal Reserve: IInflation Essay Example | Topics and Well Written Essays - 1250 Words”, n.d. https://studentshare.net/miscellaneous/302760-federal-reserve-iinflation.
Indeed, its confusing structure, organization, and responsibilities make it difficult for American's to understand. In explaining the Federal Reserve, the New York Times describes it as having, “exercised more influence over economic growth and the level of employment than other government entity.”
In simple terms, the Federal Reserve came into being by enactment of the Congress. Consequently, the Congress has the obligation of overseeing the monetary policy and the Federal Reserve. This paper analyzes the importance of the Federal Reserve and strategy in stabilizing the economy of the country.
Over the years, the system and structure if the federal reserve has evolved to meet the effects of economic crisis and great depression in the economy. The Federal Reserve System was created under the Federal Reserve Act in order to address the issue of panic in the banking industry and acts as the final check point and regulator in the clearing system and the banking industry.
The structure, roles and the responsibilities of the Federal Reserve has undergone rapid changes over the years which have been mainly stimulated by the events like the Great Depression, Global Financial Crisis, etc. The structure of the Federal Reserve System is composed of a governing board, the open market committee, regional Federal Reserve banks, privately owned banks in US and the advisory councils.
They jointly implement the monetary policy which is set by the Federal System. Every Federal Reserve banks governs the regulation of commercial banks in their district. Alexander Hamilton, the first secretary of treasury of United States, proposed the idea of instituting a National Bank in order to develop the country in terms of all the financial aspects.
It is worth noting that the collapse of the mortgage market was necessitated by Fed lax on the money market. The Federal Reserve addresses the economy by regulating financial institutions, setting monetary policies and operating the countries payment systems.
It is apparent that while the housing market is still mired in an extended slump and the number of vacant homes are increasing by the day, the economy is merely in bad, not terrible shape. The article succinctly states that the economy "is limping rather than slumping".
Similarly, an increase in the money supply increases the cost of loans and people spend less. This reduces the money supply in the economy. Similarly, when interest rates decrease the exact opposite happens and money supply in the economy increases.
1b) Open-Market Operations: In this method, the sale and purchase by central bank in the security market has desired effect on the money supply in the economy.
The key objectives of the monetary policy are stipulated in the Federal Reserve Act. This act asserts that the Federal open Market Committee and the Board of Governors should always strive to promote the goal of stable
7 Pages(1750 words)Essay
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