Federal Reserve and Money Supply Mr. Odren

The Fed Congress created Fed in 1913 as Central Banking organization. Major purpose: End periodic financial panics that had occurred in 1800 and early 1900s Other responsibilities: processing checks (why is this getting less important?), serving as the government’s banker. 12 Federal Reserve banks that serve as the nation’s banks are distributed throughout the country. Trillions of dollars pass through the Fed Closest Fed Bank to De: Philadelphia

Monetary Policy Main role of Fed is Monetary Policy. Involves changing the rate of growth of the supply of money in circulation to affect amount of money in circulation to affect the amount of credit and, therefore, business activity in the economy. Credit subject to supply and demand. Credit has a cost: Interest that must be paid to obtain it. As cost of credit increases, the quantity demanded decreases. If cost drops, quantity demanded rises.

Balancing Monetary Policy Loose Money Strategy: means credit is inexpensive to borrow and abundant. – Loose Money strategy can lead to Inflation Tight Money Strategy: credit is expensive to borrow and in short supply. – Tight Money strategy can lead to Recession

Monetary Policy Goal Goal of Fed is to strike a balance between the two strategies. Responsibility to ensure money and credit are plentiful enough to allow economic expansion However, cannot let money supply become so plentiful that rapid inflation results.