Macro #2

Introduction

The Federal Reserve or the fed is the institution within the United States that plays the role of a central bank in many other states across the globe

The Federal Reserve was formed by an act of congress in 1913 . Its main objective was to provide the nation with a more secure , flexible , and more stable monetary and financial system . The Federal Reserve is not only restricted to formulating the monetary and financial policy but also is also involved with the general formulation of policies within the government sector . This

is usually so , so that the government ministries do not implement policies that may override the projections set forth by the Federal Reserve . Over the years , the fed has seen the economy through the great depression , the two world wars as well as guiding the economy to become the largest economy in the world

The fed is an autonomous branch from direct executive control and this permit the fed to make and implement its own independent decisions . Just like in any other economy , the central bank is meant to provide the economy with a reliable and efficient monetary policy by ensuring the prevalence of a predictable and stable currency , a bearable interest rate as well as reliable float of narrow and broad money

Although the monetary policy is formulated independently , it cannot be implemented successfully without the existence of a supporting fiscal policy

ANALYSIS

Central banks , the fed being apart of them usually have some economic tools that they use to achieve their goals these include reserve ratios open market operations , discount and federal funds rates . These tools can be used independently or collectively depending on the intended changes within the economy

Although these tools usually have almost identical direct effects , the ultimate re alignment within the economy is what makes either of the tools a better policy tool depending on the nature of the economy . In times of booms or recessions , the monetary policies implemented will not have the same effects . In addition if the government is pursuing a contractionary or expansionary fiscal policy will also cause the monetary policy tools used to have different sectoral impacts

Open market operations (OMO

Open market operations involve activities like selling and buying of government bonds or treasury bonds . The sale of treasury bills to the banking sector or to the public is usually meant to reduce money supply in circulation while the purchase of the same from the public is meant to increase money supply . When the public purchases the treasury bonds they actually pay up the money to the government . Once the money is paid up , the money supply in the economy reduces by the equivalent amount . By doing this , the Federal Reserve may have intended to raise the interest rates

Once the supply declines money , the cost of getting money (interest increases . Interest can be simply described as the cost of money . When the Federal Reserve increases the prevailing interest rates , this usually discourages borrowing . Once borrowing is...