Microeconomic Principles & Policy

Microeconomic Principles Policy

2005

I . Introduction

Congress of United States created the Federal Reserve System on December 23 , 1913 . Its purpose is to provide Congress a broad perspective on the economy , and is charged with providing the nation with a safer , more flexible , and more stable monetary and financial system . Over the years , additional legislation has expanded its role in banking and the economy ( The Fed

The Federal Reserves , often called as the Federal Reserve or simply The Fed ' have four responsibilities as following

1 . Conducting the United States

' monetary policy

2 . Supervising and regulating the nation 's banking institution

3 . Maintaining the stability of the financial system

4 . Providing particular financial services to the U .S . government , to the public , to financial institutions , and to official foreign institutions

II . Monetary Policy

Monetary policy refers to actions undertaken by Federal Reserve as the Central Bank . The Federal Reserve implements monetary policy by using three principal tools , there are Open Market Operation (purchasing and selling of U .S . Treasury and Federal Agency Securities , Discount Window Lending (lending to depository institutions directly from their Federal Reserve Bank 's facility ) and Reserve Requirements (Requirements as to the amount of funds that commercial banks and other depository institutions must hold in reserve against deposits made by their customers ( The Fed

II .1 Open Market Operation

Nevertheless , we will talk about Open Market Operation briefly . As one of three principal tools monetary policy , open market operations are a powerful toll because of their relation with the balances at the Federal Reserve and the Federal funds rate (Edwards 859 . When the Federal Reserve purchases securities , it will give securities seller the check , and the seller deposits the check in its Federal Reserve account , the Federal Reserve honors the check by increasing the reserve account of the seller held by its Federal Reserve Bank . Thus , the reserves of the seller 's bank rise with no offsetting decline in reserves elsewhere . Consequently , the reserves increases . The opposite occurs too , when the Federal Reserve sells securities (Rinder 2001

However , the Federal Reserve cannot conduct monetary policy through the purchase and sale of stocks on the New York Exchange , and I think it is impossible to be done . Consider of above paragraph , we know that The Federal Reserves only influence securities , on which related with supply of balances . In addition , stocks cannot directly relate with capital market on the US , and this condition is not good enough for US economy future

II . 2 . Foreign Exchange and Domestic Money Supply

Generally , the money stock consists of currency held by the public transaction , savings , and time deposits held by the public at depository institutions the assets of money market mutual funds and certain other depository institution liabilities . The Federal Reserve affects the money stock chiefly by its influence over interest rates

If the Federal Reserve purchases foreign currency , it will decrease domestic money supply directly . But it will be avoided by doing open market operation , especially with purchase of government bond . With...