Federal Reserve

Federal Reserve and the American Economy This paper will focus on the Federal Reserve and the American economy. The American economy is not doing well at all compared it successes in the past. Tuesday, January twenty ninth the Dow Jones industrial average fall to almost 600 points. (Gross, Daniel. The U.S. Economy Faces the Guillotine, Newsweek). The United States economy has entered a time of economic trouble. People are losing there jobs. The prices of products continue to rise, while the American dollar continues to lose its value. There is a suspicion that America is quickly heading for a recession and we are taking the global economy with us. It is to be expected that an economy will rise and fall. To protect it from falling to far the government created the Federal Reserve System. According to socialstudieshelp.com, “The Federal Reserve System's main responsibility is to safeguard the proper functioning of our money system.” This paper will discuss the role of the Federal Reserve, the goals and tools of the Federal Reserve. It will also discuss monetary policy and fiscal policy, how they work, why they are used, the difference between the two, and the appropriate time to use each one. The Federal Reserve Act of 1913 created the Federal Reserve System. (http://www.socialstudieshelp.com/Eco_Banking_and_Fed.htm) This was done to separate American government Central Banking System. The Federal Reserve has the job of handling America’s money. They can destroy or create money. They also can set interest rate on borrowed money. The Fed has two ways of stabilizing the economy, monetary policy and fiscal policy. (http://www.socialstudieshelp.com/Eco_Mon_and_Fiscal.htm) Monetary policy creates “Programs that try to increase or decrease the nation’s level of business by regulating the supply of money and credit.” (http://www.socialstudieshelp.com/Eco_Mon_and_Fiscal.htm) If you have an old baseball card in mint condition, which everybody wants? It is worth a lot more than a common card that anybody can buy for a reasonable price. The harder it is to get something the more it is worth. Money is almost exactly like that. If you have too much out there and a lot is being spent, that can be bad for the economy, because it will decrease in value. According to socialstudieshelp.com, “Monetary policy is generally referred to as either being an expansionary policy, or a contraction policy, where an expansionary policy increases the total supply of money in the economy, and a contractionary policy decreases the total money supply. Expansionary policy is traditionally used to combat employment in a recession by lowering interest rates while contractionary policy has the goal of raising interest rates to combat inflation”. By lowering the interest rate on money, they hope that more money will be taken out on loans and these people will spend it and generate more money in the economy. The fed has to find the magic number of the money allowed to be put in or kept from circulation and the amount of money allowed to be spent. The Federal Reserve fiscal policy is a manipulation of government spending and taxes. It is the same as monetary in principle. By raising taxes, the government is taken money out of circulation. This is done in order to fight inflation. If the government wants to encourage public spending, they will lower taxes. The government can also invest money in the community, by creating jobs and buying products. (http://www.investopedia.com/university/thefed/fed3.asp) There is an argument in modern economics today, and that is regarding the federal funds rate and if lowering then would be a positive move for the United States economy. In the short term, lowering the interest rates would help to boost the economy. There would be more money spent, but throwing money at a problem does not fix it. If the government is worried about inflation and the decreasing value of the dollar, it should not make this move. If this money is invested and the stock market drops, lower. That money is lost. There is the possibility that those loans will not be repaid and that would just be more money wasted. There is the possibility that the American economy is heading for a recession. A recession