Professional Documents
Culture Documents
American Economy
2 June 2018
Name of the Student 2
Three ways implemented by Federal Reserve Board in regulating the supply of nation’s
money
Federal Reserve Board has implemented three ways through which they can regulate the supply
of nation’s money. They are being stated in the following points:
Federal Reserve Board creates the financial institution for maintaining funds within
Federal Reserve System. The requirement of the reserve is the percentage of the
commercial bank’s checking as well as savings accounts, which they should keep in the
form of cash in the bank’s vault. The cash can also be kept at local district bank of
Federal Reserve where there will be no interests on the deposit made. Reserve
requirement is considered to be the powerful tool of Federal Reserve. When reserve
requirement increases, there is scarcity of money, which on a long-term has the tendency
of reducing the inflation. This will results in immediate action of bank in depositing more
funds within the Federal Reserve and thus the supply of the money is being reduced.
Therefore, availability of money for the customers is less. On a long term of operation the
economy slows down. Since increase in requirements of reserves is having an impact on
every bank thus reduction of money supply takes place with lesser availability of money
for the customers. On the contrary side, decrease in reserve requirements enhances the
availability of the funds to every bank for providing loans to the customers. With the
increase in providing of loans the availability of money increases. The decrease in
requirements of reserves will lead to reduction of providing money to Federal Reserve,
which will results in increasing the supply of the money (Patrick 208). Therefore, more
money will be available for the customers, which will increases the inflation and the
speeding up of the economy.
Federal Reserve also buys as well as sells the securities of the government by utilizing
the operations of the open market. The operation of the open market consists of both
buying as well as selling off the government bonds. The money supply can be decreased
when the Federal Government sells the binds of the US Government to individuals as
well as to the public. Money received by them in the form of payments no longer
circulates and therefore the supply of money is reduced. When Federal Government
desires n increasing the supply of money, then they buy back the bonds of the
government from corporations, organizations as well as individuals, which they have
sold. The fund paid by the Fed for securities enters within the circulation and therefore
the supply for the money increases. This is the reason that led the Chairman of Federal
Reserve Board Mr. Bernanke in buying back the bonds at the time of recession that hits
recently. This concept will help in the growth of the economy.
Federal Bank also manages the rate of discount in order to control the supply of nation's
money. The rate of discount is the rate of interests that sis being charged by Fed for
providing loans to the member banks. Increase in discount rate results in discouraging the
banks to borrow as well as minimizes the available loans number, which reduces the
supply of the money. Lowering rate of discount on other hands also encourages the
member banks for borrowing the money as well as the increase in funds for the loans
availability that increases the supply of the money. Both rates of discounts as well as the
rate of federal funds are the two rate of interests that are controlled by Federal Reserves.
Name of the Student 3
Reference List
Gavin, William. "The M1 target and disinflation policy." Small 11 (2016): 17.
Patrick, Sue C. Reform of the Federal Reserve System in the early 1930s: the politics of money
and banking. Vol. 12. Routledge, (2017): 205-210.