Monetary Policy in The United States
In 1913, the Federal Reserve Bank (Fed) system was established to help prevent credit and money supply from drying up during economic contractions (Hall, 2022). When it comes to controlling the money supply, the Fed uses four tools: “(1) the establishment of reserve requirements for banks, (2) buying and selling U.S. government securities and other financial assets in the open market, (3) the volume of loans extended to banks and other institutions, and (4) the interest rate it pays banks on funds held as reserves (Gwartney, Stroup, Sobel, & Macpherson, 2018). The determination of the restriction or expansion of money supplies is dependent on the loans from financial institutions. Banks extend loans when the reserve requirement ratio is low, allowing the money supply to expand. Banks tend to reduce their investments and loans when the reserve requirement is high, triggering a reduction in the money supply.
Bank systems can create money by maintaining a percentage of a deposited amount and lending excess amounts (Coppola, 2022). A proportion of the percentage of reserves is dependent on the reserve ratio, which must be maintained against checkable transaction deposits (Gwartney et al., 2018). The percentage of the reserves dictates the amount that should be held; to create money, the bank makes loans available by using the excess reserves.
The Fed has helped stabilize a good functioning economy in the U.S., creating a list of pros and cons regarding the Fed’s operations. A positive is that the Fed has implemented and established a single currency for the country, which has helped the economy function effectively. Besides establishing a single currency, the Fed has ensured a sound financial system by conducting monetary policies influencing the economy’s credit and money conditions to provide stable prices and full employment (Lombardo, 2017). A con tied to the Fed is the manipulation of the
U.S. economy by setting national interest rates, as it can increase and lower rates, which can hinder or increase economic growth (Lomabardo, 2017). Another con is that the Fed is often portrayed as favoring private interest over that of the public. The notion of the Fed being influenced by private interest and lobby groups allows individuals to benefit rather than society, exploiting the public’s well-being (Lomabardo, 2017). As seen in the 2000s, a seven-board member committee controlled the nation’s economy through open market operations driven by political interest under the Bush administration (Forbes, 2018).
I believe that it is essential for the U.S. to have The Federal Reserve Bank, as it allows for controlling the money supply and implementing monetary policy. The notion that the Fed is acting in favor of private interest and lobby groups I believe that the Fed should also be subject to audits (Lombardo, 2017). The appointment of board members by the president can be seen as an advantage to the administration and seen as political influence instead of serving the people. I think that members of the board should be selected/voted in by the public for transparency.
Coppola, F. (2022, April 14). How bank lending really creates money, and why the magic money tree is not cost-free. Forbes. https://www.forbes.com/sites/francescoppola/2017/10/31/how-bank-lending-really- creates-money-and-why-the-magic-money-tree-is-not-cost-free/?sh=1f3b070e3073
Forbes, S. (2018, April 30). New Fed Head Same Old, Bad Old. Forbes, p. 13.
Gwartney, J. A., Stroup, R. L., Sobel, R. L., & Macpherson, D. A. (2018). Macroeconomics: Private and public choice (16th ed.). Retrieved from https://www.cengage.com
Hall, M. (2022, April 20). How the Federal Reserve manages money supply. Investopedia.
Lombardo, C. (2017, January 14). Pros and cons of Federal Reserve. Vision Launch Media. https://visionlaunch.com/pros-and-cons-of-federal-reserve/
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Prior to beginning work on this discussion,
Read Chapter 13 of Macroeconomics: Private and Public Choice.
Monetary policy is largely determined by the Federal Reserve Bank (Fed) in the United States. For this discussion, let’s cordially debate the necessity of the Fed.
For your initial post, address the following:
- How does the Fed control the money supply? Be sure to explain how they can expand or restrict the money supply.
- How does the banking system create money?
- List two to three pros and cons of the Federal Reserve Bank.
- What is your conclusion: is the Fed necessary? Support your opinion.
Your initial response should be a minimum of 200 words. Graduate school students learn to assess the perspectives of several scholars. Support your response with at least one scholarly and/or credible resource in addition to the text.
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