Effectiveness of the Federal Reserve in Stabilizing the Current Economy

2450 WordsFeb 7, 201810 Pages
Evaluate the role and the effectiveness of the Federal Reserve in stabilizing the current economy. The role of the Federal Bank is to manage the nation's monetary system. It does so by three different methods: It can change the interest rate on money that it lends to banks. A higher interest rate makes money more expensive. Banks may be, therefore, more reluctant to sign loans to applicants. On the other hand, the Bank by lowering interest rates can encourage banks to more readily lend loans. The Federal Reserve has the authority to change reserve requirements. (I.e. the percentage that banks have to store in their vaults that represent their total HYPERLINK "http://www.blurtit.com/q717809.html" loan portfolio). By the Federal Reserve lowering their requirement for money that banks have to store in their vaults), banks can be more liberal with their loans. The Federal Reserve controls the money supply. This, in turn, has an impact on inflation and interest rates. In other words, when inflation is high, the FR reduces money supply, and increases the money supply when there is poor economic growth and the economy needs it (Mishkin, 2007) The FR's most recent attempts to stabilizing the economy veer towards supporting housing and helping growth of employment. The problems right now in the housing market are that there are too-tight lending rules and racial discrimination. The FR, consequently, decided to take certain steps which would include: Easing monetary policy by

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