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The Federal Reserve Essay

803 words - 4 pages

How the Federal Reserve Operates
ECO/372
October 22, 2012

The Federal Reserve
The Federal Reserve has three main tools it uses in order to control the money supply. One of the first tools they use is the open market operations. Open market operations consist of selling and purchasing of government bonds to the public and commercial banks. These operations are the most important of the tools the Reserve can use that influences the money supply. The second tool that is used by the Federal Reserve is called adjustment of the reserve ratio. The Reserve ratio is a ratio of required reserves that the banks has to keep in their own outstanding checkable deposit liabilities (Brue, ...view middle of the document...

This could kill the demand and knock the economy into a recession. It is never good when the economy is failing and goes into a recession that leads to businesses closing, which leads to higher unemployment rates.
The monetary policy is a gradual process, in which they are put into effect to influence the amount of money and the amount of credit that will become available to the economy. This influence will put pressure on the supply of the credit by lowering and raising short term interest rates. This is another way of keeping the amount of money in the economy where it needs to be so that the amount of the dollar does not fall.
Stimulus programs are put together to help a floundering economy. A stimulus package tends to reinvigorate the economy to reverse or prevent the recession by raising the spending and employment rates. The stimulus is given to help put money back into the economy and create healthy spending again. The Stimulus programs that they have put in place have seemed to work for a little while. They can back fire because where the government is giving it to be out there to replenish spending some people still do not use it as it was really intended.
One major indicator that there is too...

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