Federal Reserve Vs Foreign Exchange Essay

This role is achieved through the implantation of the monetary policies. According to Arnold (2008), Fed has several tools at it disposal that it uses in the monetary polices. These are; the open market operations which involve buying and selling U.S government securities in the financial markets. Further the bank is charged with the responsibility of determining the required reserve ratio. This ratio is given to the commercial banks dictating the minimum amounts that they should hold in to their accounts as deposits and for lending. Finally the Fed sets the discount rates putting in to consideration the overall market rates s well as desired effect on borrowing that the Fed seeks to achieve. In addition to these three major roles, as a bank, the Federal Reserve Bank can play the roles played by the commercial banks as the rules are not entirely prohibitive as far as this duty is concerned.

Even before the creation of the Federal Reserve, banks were used by the public just as we use them today. Deposits were made into savings accounts. Loans were taken out to mortgage a home or finance a new business. Banknotes were issued and spent when the public borrowed from the banks. Borrowers spent these banknotes just as paper money is spent today. These bank notes were valued as money since they were backed by the promise that they would be exchanged on demand for either gold or silver.

“1971 would become one of the great ironies of American monetary history.” (Lehman, Lewis E) In the economy the Federal Reserve can control the prices on product and when they do this they can move the price up and down to slow down the buying process or speed it up to help business make more money and help with employment. Furthermore, the Federal Reserve also controls the interest rates for banks because when inflation happens in the economy like when prizes of good and services are in high demand. The worker is going to want more money to compensate for working harder to supply the consumer or the product price goes up because it in high demand so the Fed will try and regulate the market by higher the interest rates to help manage the inflation. Then when work is slowing down the Federal reserve will lower the interest rate to help spark the economy to raise more jobs to lower the unemployment. It can also effect a lot of things in the economy. It like throwing a pebble in the water it then has a ripple effect in the economy it will spread in all around when one thing that is change it will affect many things. When they change the interest rates it like throwing in the pebble in to the economy that ripples through the economy effect the business and consumers. Which this help the Federal Reserve control the economy so they can accomplish

In December of 1913, the Federal Reserve System (Fed) was created by the Federal Reserve Act. According to Congress, the role of the Federal Reserve System is to promote maximum employment, stability and growth of the economy, and moderate long-term interest rates. The Fed employs Monetary Policy in an effort to manage both the money supply and interest rates while stimulating the economy to operate close to full employment. One school of thought called Monetarism believes that the Federal Reserve should simply pursue policies to eliminate inflation. Zero inflation may help the market to avoid imbalances, stabilize the business cycle, and promote steady growth in our economy. On the other hand, zero

Currency intervention is the action of one or more governments, central banks, or speculators that increases or reduces the value of a particular currency against another currency – this is according to Wikipedia.

The United Stated Federal Reserve Board (the Fed), a component of the Federal government, conducts monetary policy. The Fed essentially plays the role for the nation’s banks that these banks play for us. Just as we borrow money from the banks, the banks borrow money from the Fed. Just as we pay interest on the money we borrow, banks pay interest on the money that they borrow from the Fed. The Fed can use monetary policy to decrease unemployment by lowering the interest rate that it charges banks. If banks are able to pay a lower interest rate to borrow from the Fed, they are likely to lower the interest rate that they charge the

The Federal Reserve should utilize a balanced approach to monetary policy. The current state of the economy—undershot employment and inflation goals—presents no conflict in achieving a neutral state. In fact any action that supports employment growth also moves inflation up toward our target (Evan

The Gross Domestic Product (GDP) is a calculation that provides insight into the current economy of our nation to allow individuals to understand the current and past year’s standings in the economy. The calculation of the GDP allows for the government to determine what adjustments are necessary to manage an effective status for the economy. Based upon the GDP the government can forecast any necessary changes that must be made to either the monetary policy or the fiscal policy. The wealth of a country is based upon the government’s ability to manage the economy through the monetary system and not on the amount of money that is located within that economy. The calculations for the GDP are produced to provide the most

One form of direct control can be exercised by adjusting the legal reserve ratio (the proportion of its deposits that a member bank must hold in its reserve account), and as a result, increasing or decreasing the amount of new loans that the commercial banks can make. Because loans give rise to new deposits, the possible money supply is, in this way, expanded or reduced. This policy tool has not been used too much in recent years. The money supply may also be influenced through manipulation of the discount rate, which is the rate if interest charged by the Federal Reserve banks on short-term secured loans to member banks. Since these loans are typically sought to maintain reserves at their required level, an increase in the cost of such loans has an effect similar to that of increasing the reserve requirement. The classic method of indirect control is through open-market operations, first widely used in the 1920s and now used daily to make some adjustment to the market. Federal Reserve bank sales or purchases of securities on the open market tend to reduce or increase the size of commercial bank reserves. When the Federal Reserve sells securities, the purchasers pay for them with checks drawn on their deposits, thereby reducing the reserves of the banks on which the checks are drawn. The three instruments of control explained above have been conceded to be more effective in preventing inflation in times of high economic activity than in bringing about revival from a

Foreign currencies are an asset to the Fed. The Fed controls the foreign-exchange rate of its currency to foreign currencies by buying and selling foreign currency. When the dollar is too strong on foreign currency on the Fed's view, and they want the U.S. dollar to be weaker, and then the Fed will sell U.S. dollars and buy foreign currency. This transaction causes the monetary base to increase. However, in order to sterilize the effect of intervention on the supply of Federal Reserve balances, the FOMC would then sell an equal amount of U.S. Treasury bills for cash in the open market to raise the supply of balances back to its former level. The operations have no net effect on the level of foreign currency balances at the foreign central bank

Foreign exchange is the trading of a currency for another or the changing of a currency into another currency. Foreign exchange can further be defined as a market which is global and in which currencies are allowed to trade throughout the world. An exchange rate regime on the other side is the nature to which a currency is managed in relation to another by authorities at the exchange market. It has similarities to those of monetary policy since they all depend on same economic factors. The foreign exchange regime is classified by the level to which the government intervenes in it. There for it only falls into one of the following;

"If you want to know the value of money, go and try to borrow some." This quote by Benjamin Franklin seems to have laid a foundation for several financial concepts and practices. International trade and domestic monetary policy of a country are closely connected to each other. A financial incentive can increase export opportunities for trading partners whereas foreign exchange controls for balance of payments can inhibit exports. Intervention of the Apex bank in foreign exchange markets may fuel exports and impede imports or vice-versa, subject to the direction of manipulation.

The central bank is used to engage in the numerous financial transactions it deals with daily. It can supply currency, provide deposit accounts to the government and commercial banks, make loans, and buy and sell securities and foreign currency. As a result, this causes changes to the central bank’s balance sheet. The central bank’s balance sheet shows three basic assets, which are securities, foreign exchange reserves, and loans. The securities and foreign exchange reserves are needed so the central bank can perform its role as being the government’s bank. While the loans are a service to the commercial banks. Before the

Effectively, what happens is when countries want to import goods, they either have to directly barter those for their own exports, or first buy currency from the exporting country with which to purchase the exports. Exporting countries often want payment in their own currency, so if the purchasing country has a reserve of the foreign

The main functions of the central bank are that it controls the issue of legal tender and it has monopoly over it, thus in a way also has the control over the supply of money in the economy. As the central bank is the banker’s bank it has control over both the banking and the non-banking financial institutions. It is the government’s bank and performs traditional banking operations, lending and deposit taking for the government it has enough capacity to manage and administer the country’s national test. The central bank acts as the mediator and regulation with regard to the foreign exchange and gold reserve. The central bank plays a very important role in order to maintain and stabilize the price level and