Re-write with less than 25% plagiarism.

Assignment: The Federal Reserve Due Week 8 and worth 200 points The Federal Reserve offers to the general public numerous publications available at the Website of the Federal Reserve Board here. The Federal Reserve Board testimonies, press releases, monetary policy reports, the Beige Book, and a variety of other publications offer a detailed assessment of current economic activity, financial markets, and the monetary policy tools used to promote economic activity and preserve price stability. Write an eight to ten (8-10) page paper in which you:

1. Evaluate the role and the effectiveness of the Federal Reserve in stabilizing the current economy.
2. Determine which economic indicators the Federal Reserve should analyze so it can better stabilize this particular economy.
3. Describe which monetary policies the Federal Reserve might use to influence the money supply.
4. Explain the strengths and weaknesses of using monetary policy in comparison to fiscal policy when promoting economic activity and preserving price stability.
5. Analyze the effect of the Federal Reserve?s action you identified in #3 on the aggregate demand / supply model.

Your assignment must follow these formatting requirements:

• Be typed, double spaced, using Times New Roman font (size 12), with one-inch margins on all sides; citations and references must follow APA or school-specific format. Check with your professor for any additional instructions.
• Include a cover page containing the title of the assignment, the student?s name, the professor?s name, the course title, and the date. The cover page and the reference page are not included in the required assignment page length.

The specific course learning outcomes associated with this assignment are:

• Analyze the basic operation of banks, the structure of the banking industry, and the major regulatory processes controlling banks.
• Evaluate monetary policy and its impact on economic growth and business cycle.
• Analyze the various theoretical approaches and models and assess their use in shaping monetary policy.
• Use technology and information resources to research issues in money and banking.
• Write clearly and concisely about money and banking using proper writing mechanics.

Running head: THE FEDERAL RESERVE The Federal Reserve Mark Flores Dr. Bonina ECO 320: Money and Banking 11/28/2016 1 THE FEDERAL RESERVE 2 1.) Evaluate the role and the effectiveness of the Federal Reserve in stabilizing the current economy. The Federal Reserve System is made up of regional Federal Reserve banks and the Federal Reserve Board of Governors, which their main responsibility is to supervise and to examine the state-chartered member banks, also to regulate banks holding companies, and finally to be responsible for the conduct of the monetary policy (King, 2012). One of the most important duties of the Federal Reserve is to keep full employment and to maintain a low state of inflation (CPI= 2%). The Webster dictionary gives the definition of money as: \"A commodity, such as gold, or an officially issued coin or paper note that is legally established as an exchangeable equivalent of all other commodities, such as goods and services, and is used as a measure of their comparative values on the market.\" Money has three basic functions: a medium of exchange, a measure of value, and a store of value. Goods and services are paid for in money and debts are brought upon and then paid off in money. Without money, economic transactions would have to take place on a trading basis. So, money is a good thing for Humanity. It frees people from spending too much time running around exchanging goods and services. 2.) Determine which economic indicators the Federal Reserve should analyze so it can better stabilize this particular economy. Two important variables and indicators we can use to figure out how to stabilize the economy, are unemployment and inflation. Feds try to keep both rates low, but unfortunately it is unable to affect these variables directly. The Fed do not have the ability to direct firms on their employment percentage or what prices to charge for their services or products (Harrison, 2012). Instead, the Fed uses variables, called monetary policy targets, that it can affect directly and that, in turn, affect variables, such as real GDP, employment, and the price level, that are closely THE FEDERAL RESERVE 3 related to the Fed's policy goals. The two main monetary policy targets are the money supply and the interest rate. Fed typically uses the interest rate as its policy target. The Federal should seek the policy setting that generates the best achievable path back to full employment and price stability following shocks that push us away from either of our objectives. The recent financial crisis underlines that open market operations alone can be insufficient at times for meeting the Federal's statutory mandate (Hubbard, 2010). Since the crisis, many economists and central bankers have argued that a macro prudential approach to supervision and regulation is needed, and this may affect conduct of monetary policy to maintain maximum employment and price stability (Hubbard, 2010). The effects of monetary policy on production and employment within the economy are very significant. By manipulating the real interest rate, the demands for goods and services is affected as well as the unemployment. When the real interest rate is lowered, then borrowing money is more eye-catching, business will increase investment spending and then consumers will buy more durable goods (Croushore, 2012). The Federal Reserve Bank oversees the banking system in the United States and helps to control inflation in the nation by set policies that regulate the amount of more in a nation so the value of money in the United States does not decline. Monetary policy affects all kinds of economic and financial decisions people make in this country--whether to get a loan to buy a new house or car or to start up a company, whether to expand a business by investing in a new plant or equipment, and whether to put savings in a bank, in bonds, or in the stock market. The Federal Reserve should make changes to their current monetary policy to assist in bringing the economy back to a position that will decrease THE FEDERAL RESERVE 4 the unemployment rate, bring down inflation that will assist in bringing the economy out of a recession. 3.) Describe which monetary policies the Federal Reserve might use to influence the money supply. The Federal Reserve manages the nation's monetary system with three tools in its monetary toolbox: open-markets operations, reserve requirements, and the discount rate (Mankiw, 2007). The most important and flexible tool of monetary policy is open-market operations. It is important because when a shortage or surplus in reserves is likely to persist, the Fed may undertake outright purchases or sales, creating a long-term impact on the supply of reserves. In an open market operation, the Federal Reserve will buy or sell government bonds to enhance or reduce the supply of money. However, many reserve movements are temporary (Jeffry, 2007). The Fed can then take a defensive position and engage in transactions that only impose temporary effects on the level of reserves. When the Federal Reserve buys government bonds then the supply of money will increase and it will flow within the economy. When the Feds sell their bonds, it raises their supply of money. Requirements by the reserves are to standardize the money that banks are allowed to loan. The Fed can also change reserve requirements, controlling a portion of deposits that banks must hold as vault cash or on deposit at the Fed, which affects the available liquidity within the market. If Feds increased the reserve rate, then banks are required to hold excess money in the reserve (Croushore, 2012). Lastly the Federal Reserve uses the discount rate. Discount rates are set by the Feds at a mark-up, over the federal funds rate banks borrow money from. Discount rate is known as the THE FEDERAL RESERVE 5 interest rate a bank pays on its loan from the Federal Reserve (Croushore, 2012). When rates are higher, this deters banks from borrowing money from the Federal Reserve. This will reduce the supply of money. Control over rates and credit conditions will not always align with law and demand. Monetary policy, theoretically is made to decrease the money supply and raise the interest rates, or raise money supply and lower the rates to keep the economy balanced, while controlling the economic growth. Indicators were created to help changes that will keep the economy stable. Indicators will not always be accurate or are not seen for long term. Effects could be the position the US economy is facing today. Feds may directly influence only a very short-term interest rate; this rate influences other longer-term rates. However, this relationship is far from being on a one-to-one basis since the longer-term market rates are influenced not only by what the Fed is doing today, but what it is expected to do in the future and what inflation is expected to be in the future (Jeffry, 2007). 4.) Explain the strengths and weakness of using the monetary policy in comparison to fiscal policy when promoting economic activity and preserving price stability. Raising and lowering of interest rates directly impact the effects of production and employment. The demand for services is not directly connected to interest rates in the economics page, but is known as nominal rates (King, 2012). Instead, it is linked to real interest rates that is, nominal interest rates lesser amount the predictable rate of inflation. The Federal Reserve operates only in the market for bank reserves. Being the only provider of reserves, it has the ability to deposit nominal funds rate. They can't set real interest rates unswervingly because it can't set price increases outlook directly, even though predictable inflation is personally attached to what the Fed is estimated to do in the future (Good friend, THE FEDERAL RESERVE 6 1983). The Fed has also stayed out of the big business of setting nominal rates for longer-term instruments and as a substitute allows monetary markets to determine longer-term interest rates. The changes in real interest rates have an effect on the public's demand for goods and services mostly by changing loaning costs, the accessibility of bank loans, the prosperity of households, and foreign exchange rates. An example would be the decline in real interest rates lowers the cost of borrowing; that can lead to companies raising their investment costs, and it leads households to purchase long-lasting goods, such as vehicles and new houses. Lower real rates and a strong economy may raise banks' keenness to lend to companies and households. This may amplify spending, mainly by minor borrowers who have little sources of credit other than banks (Madigan, 2002). As you see money has many purposes and functions. The intentions of the monetary systems are to put more money in the economy's circulation to increase production and employment (Madigan, 2002). 5.) Analyze the effect of the Federal Reserve's action you identified in #3 on the aggregate demand/supply model. If money and credit expand too fast the companies cannot keep up with increased spending. This could in turn cause inflation. The next step would be a recession. The economic recovery that began in the middle of 2009 appears to have strengthened in recent months, but to date, the growth has not been fast enough to bring about a significant improvement in the job market. There has been increased evidence lately of a self- sustaining recovery in consumer and business spending. The spending is increasing, but the job market is slowly increasing. There were some gains in employment back in 2010. These gains were barely sufficient to THE FEDERAL RESERVE 7 accommodate the inflow of recent graduates and other new entrants to the labor force and, therefore, not enough to significantly reduce the overall unemployment rate. There are a wide range of market indicators that say the Federal Reserve's securities purchases have been effective at easing financial conditions. The financial markets have responded favorably to the Federal Reserve's policy actions provides significant support to job creation and the economy. When we are in a recession, Congress should increase government spending in order to \"prime the pump\" of the economy. They should decrease taxes in order to give households more disposable income with which they can buy more products. This method helps in stimulating the economy by opening up production, hiring workers, increasing individual household incomes enabling them to spend money. The reduction in aggregate demand brought about by such actions leads firms to produce fewer products, slows hiring, and reduces inflationary pressure. If taxes are reduced, consumers will not spend all of their increase in disposable income; they are likely to save some of it. In the same way, if taxes are raised, consumers are not likely to reduce their consumption of products by the same amount as the tax; they are likely to dip into savings to cover some of the change in tax rates. During a recession, the Federal Reserve will buy bonds on the market has one of their tools to change the money supply. By increasing the reserves the banks hold, the banks have more money available to loan and can reduce their interest rates (Unknown, 2012). At the lower interest rates, consumers and firms are more willing to borrow to make purchases, and aggregate demand can increase. Secondly, it is recommended that the Fed lower the discount rate. When the Fed reduces the interest rate member banks must pay to borrow from the Fed, banks become more willing to borrow, to make more money available for loans at lower interest rates. In this case, again, consumers and firms are more willing to borrow THE FEDERAL RESERVE 8 and spend, increasing aggregate demand. Third, Fed has a requirement to reduce the reserve during a serious recession. If banks are allowed to release more of their reserved funds for loans, the lowered interest rate will again entice consumers and firms to borrow funds to make purchases, increasing the aggregate demand (Unknown, 2012). Challenges come in many forms for the Federal Reserve to enforce and support our monetary policies. They are faced with the challenge of changing our current economy and leading the nation into a productive and prosperous new economy. Our nation cannot expect to grow its way out of our fiscal imbalances, but a more productive economy will ease the tradeoffs. When assessing the health of the economy and the impact of past, current and future monetary policy actions, the FOMC will look closely at GDP growth, employment, unemployment, and other economic data. Reference Goodfriend, M. (1983, September). Discount window borrowing, monetary policy, and the postOctober 6, 1979 Federal Reserve operating procedure. Journal of Monetary Economics , pp. 343356. THE FEDERAL RESERVE 9 King, R. G. (2012, March). Central Banking in an Open Economy. Retrieved May 15, 2012, from International Journal of Central Banking: http://www.ijcb.org/journal/ijcb12q1a8.htm Madigan, B. (2002, July). Proposed Revision to the Federal Reserve's. Federal Reserve Bulletin , pp. 312-319. Unknown. (2012, April 25). EconEdLink. Retrieved May 4, 2012, from The Federal Reserve and Monetary Policy: http://www.econedlink.org/economic-resources/focus-on-economic-datafederal-reserve.php Bernanke, Ben S., Chairman. (2011). National Press Club, Washington, D.C. \"The Economic Outlook and Macroeconomic Policy. Colander, D. (2008), Economic (7th ed). New York, NY: McGraw-Hill Irwin. Croushore, D. (2012). M&B2 (2nd ed). Mason, OH: Cengage Learning Federal Reserve.Org. (2012). The Federal Reserve http://www.federalreserve.gov/monetarypolicy/bst_crisisresponse.htm Hubbard, R. G., O'Brien, A.P. (2010). Economics, Third Edition. Publisher: Pearson Education. Jeffry, E. (2007). How Does the Federal Reserve Affect Interest Rates http://ezinearticles.com/?How-Does-The-Federal-Reserve-Affect-Interest- Rates?&id=404238 Mankiw, N.G. (2007), Principles of Economics (4th ed.). Mason, OH: Cengage Learning