ECO 372 Week 3 Learning Team Reflection Federal Reserve System

Week 3 Reflection
ECO/372
“Week Three takes focuses on interest rates, the Federal Reserve System and how the money multiplier effect facilitates the creation of money. The main topics uncovered for this week include Federal Reserve System, multiplier effect and monetary policy” (Week Three Student Guide).
We learned about what money is and what it does. Money is a highly liquid financial asset that’s generally accepted in exchange for other goods, is used as a reference in valuing other goods, and can be stored as wealth (Colander, 2010, p. 313). We learned about how money is created. Banks create money by borrowing money from the public and then lending it back to public with interest. The money is created because they started with the original amount plus the amount that was loaned out minus a reserve that they have to keep.
We also learned about the Federal Reserve System (The Fed), and what its purpose is.
The Fed is relatively independent. It has the independence to conduct its business how it sees fit as long as it falls under the legislation established by Congress. Congress gave it six explicit functions:
1. Conducting monetary policy (influencing the supply of money and credit in the economy).
2. Supervising and regulating financial institutions.
3. Serving as a lender of last resort to financial institutions.
4. Providing banking services to the U.S. government.
5. Issuing coin and currency.
6. Providing financial services (such as check clearing) to commercial banks, savings and loan associations, savings banks, and credit unions (Colander, 2010, p. 345).
We learned about monetary policy and how it affects the money supply and interests rates. Expansionary monetary policy is a policy that increases the money supply and decreases the interest rate. It tends to increase both investment and output.
Contractionary monetary policy works in the opposite direction. Contractionary monetary policy is a policy that decreases the money supply and increases the interest rate. It tends to decrease both investment and output (Colander, 2010, p. 341)
During week three our knowledge increased immensely with the concepts of interest rates, U.S. monetary system and money multiplier caused by the Federal Banks of the U.S. and the banking system respectively.
The Federal Banking system is responsible for maintaining a healthy interest rate that balances the creation of credit and also ensure that the nominal and real rate are kept within the prescribed boundaries. The Federal Discount Rate for example is used to control the amount of money that is in circulation at any given point in time. Based on predetermined boundaries the FED can issue bonds to cut back on the money supply or sell bonds to contract the amount of money that is circulation.
What was fascinating is the process used by banks to create money using customers’ deposits. The use of current deposits to create loans minus the required reserve has been the reason for the existence of banks whether they are commercial or savings banks.

Reference
Colander, D. C. (2010). Macroeconomics (8th ed.). Boston, MA: McGraw-Hill/Irwin.