Fed reserve Essay
1. First of all, the Federal Reserve can change the money supply through the interest rate policy it decides to promote.
Indeed, increasing the interest rates would encourage the population to save rather than spend, because of the higher returns it can thus obtain. This means that, through the commercial banks, the Federal Reserve can reduce the amount of money in circulation at a certain point or other.Second of all, through new monetary emissions, by printing new money, the Federal Reserve can increase the amount of money in circulation at a certain time. This means that the monetary supply will increase if the Federal Reserve places more money on the market.Third of all, the Federal Reserve can modify reserve policies, which means that it can regulate the amount of money by increasing the amount of reserves that banks are liable to have at any moment given in time. This will regulate credit policy and decrease the amount of money lent by banks, thus impacting the monetary supply.2. An economy that is growing to quickly is an economy that could encourage inflation, at least in the long run, and could thus have negative overall effects.
If the economy is growing too quickly, the most efficient tool that the Federal Reserve can use is, again, the interest rate policy. Indeed, by increasing the interest rate, it can determine more people to be interested in the returns obtained in their bank deposits and would encourage more people to save rather than spend their money.On the other hand, higher interest rates mean more expensive credits, which means that businesses will be less likely to give way to borrowing in order to finance their activities. This will naturally mean that these business are likely to have a relatively smaller activity, based more on their own resources rather than on outside credit. In the end, this means that the economy will cool, because companies on the market will have restrained their activity.3.
The main tools for the Federal Reserve during a period of recession are those tools that will stimulate investments and growth. In order to stimulate investments, the Federal Reserve will have to restrain the tendency to save for the population and offer cheaper credits by lowering the interest in the country. A lower interest rate from the Federal Reserve will make the banks reduce their credit costs and will encourage businesses to turn to credit in order to finance their activities. Because of the cheaper credits, they can afford more activity, leading to job creation in the end, and economic growth.On the other hand, we need to keep in mind that the Federal Reserve is an institution that needs to coordinate with the other institutions of the state. In this sense, there is a need for macroeconomic correlation with these other public entities, notably the government, in creating and applying the measures that will lead to economic growth. As such, Fed policies have to encourage a good absorption of governmental spending, generally applied in times of recession.
4. An important tool that can be used by the Federal Reserve is the adjustment of the reserve level for commercial banks. This will encourage an increased loaning policy with these banks and this will make companies be able to extend their financial leverage so as to stimulate their businesses.