BUS 626 W4D1

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Ashford University *

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626

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Economics

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Jan 9, 2024

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Central banks are the institutions that enforce monetary policy for the economic flow of a country's money supply. The Federal Reserve is that institution in the U.S.; using its role to increase/decrease the amount of currency and credit that is in circulation. The Fed has 4 different tools that it can use to control money supply. These include (1) establishing reserve requirements for banks (higher reserves = less money circulating, while lower reserves = more circulation) (2) buying/selling U.S. government securities or other assets on the open market (buying securities = increased money supply, selling = decreased money supply) (3) extending loans to banks, and (4) paying banks the interest rate it holds on funds in reserves (Gwartney et al, 2022, pg 259). The banking system creates money through expansionary monetary policy. This is done as a means to increase economic growth and potentially decrease unemployment. In this manner, the federal funds rate will be decreased. This will lower interest rates which will encourage consumer spending through increased credit and lending (Curry, 2023). Some pros of the Federal Reserve is that it can help provide economic stability and banking oversight. Such measures can be beneficial for stabilizing consumer prices and the labor market while also ensuring that U.S. banks are not taking on too much risk. However, some view the ability to control money supply as a negative. That the ability to buy assets and increase the currency in circulation may further harm the national debt that the U.S. is facing (Duggan, 2022). I do think the Federal Reserve is a necessary role in the U.S. economy. While arguably some questionable decisions in the past (for ex: criticisms of previous bailouts which some argue only continue to encourage risky behavior), it serves as a bridge between the federal government and the private sector. The "Bank for banks" sets a standard for other institutions to follow. When it also comes to controlling the economy, fiscal policy is the other standard to do so. Doing away with the Federal Reserve would remove the monetary policy "lever" and leave mainly fiscal policy (i.e. taxation and government spending). Having an institution that is independent of the government to help regulate and control the economy serves as a balance to fiscal policy which may be prone to partisan forms of politics as well. References Curry, B. (2023, April 12). Monetary policy: How central banks regulate the economyLinks to an external site. . Forbes Advisor . https://www.forbes.com/advisor/investing/monetary-policy/ Duggan, W. (2022, May 25). Federal Reserve Bank Definition . U.S. News. https://money.usnews.com/investing/term/federal-reserve-bank Gwartney, J. D., Stroup, R. L., Sobel, R. S., & Macpherson, D. A. (2022). Macroeconomics: Private and public choice (17th ed.). Cengage Learning.

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