The Federal Reserve is responsible for managing the U.S. money supply.A.) List and thoroughly explain 6 of the functions of the Federal Reserve System. Be specific. b.)Please thoroughly and completely explain how money is created and destroyed.c.) Please thoroughly and completely explain how the 3 tools of monetary policy would work to address the problem of recession. Include the impact of those tools on the key economic variables.  Specifically, I want you to explain how each of the 3 tools would work using the chain of events approach.

Question
Asked Dec 2, 2019
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  1. The Federal Reserve is responsible for managing the U.S. money supply.

A.) List and thoroughly explain 6 of the functions of the Federal Reserve System. Be specific.

 

b.)Please thoroughly and completely explain how money is created and destroyed.

c.) Please thoroughly and completely explain how the 3 tools of monetary policy would work to address the problem of recession. Include the impact of those tools on the key economic variables.  Specifically, I want you to explain how each of the 3 tools would work using the chain of events approach.

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Expert Answer

Step 1

a.

The Federal Reserve is the central bank of the US economy. There are mainly six functions to the Fed and they are as follows:

  1. Overview the Federal Reserve System: The Federal Reserve System is the central bank of the US economy. The central bank means it is the apex monetary authority for the economy as well as the lender of the last resort for the economy. There are many commercial banks and financial institutions in the US economy which deals with the financial matters of the economy. The function of overview of this Federal Reserve System is vested with the Fed in the US economy. There are five other major functions that the Fed performs.

 

  1. Conducting monetary policy: The monetary policy is the policy of the monetary authority of an economy regarding to the interest rate in order to target the money supply and inflation in order to attain stability in the economy. Since Fed is the apex monetary authority in the US economy, it has the prime function of conducting the monetary policy according to the requirements of the economy. When there is inflation, it has to take the contractionary monetary policy and vice versa.

 

  1. Promoting financial system stability: The financial stability is the important factor of the economy. The financial stability is important because when there is no financial stability for an economy, there will be very less investors who will be willing to invest in the economy. Thus, a financially unstable economy will face very hard time to grow and develop its economy. Thus, balancing the economy and developing the financial stability in the economy is the third function of the Fed in the US economy.

 

  1. Supervising and regulating the financial institutions and activities: There are many financial institutions in the economy which fosters to the financial needs of the various sections of people in the economy. When there are many financial institutions, it is very important to control the financial institutions in order to avoid the unexpected business cycle fluctuations in the economy. Thus, being the apex monetary authority of the US economy, the supervising and regulating the financial institutions and activities are vested as a function of the Fed.

 

  1. Fostering payment and settlement system safety and efficiency: There are many payment methods in the economy which includes the offline mode of payments, online mode and through banks. These transactions should be safe and secure in order to promote the growth and development of the economy. When the payments and settlement systems are not efficient and safe, investors will keep out of the economy. Thus, fostering the payment and settlement system safety and efficiency is an important factor and the function of the Fed.

 

  1. Promoting consumer protection and community development: The consumers of the financial institutions are the common people and the financial institutions such as the commercial banks operate mainly on the deposits accumulated from the general public. Thus, it is very important to ensure the consumer protection and community development of the US economy which comes as the 6th function of the Fed in the US economy.
Step 2

b.

The money in the economy is created and destroyed by the apex monetary authority of the economy. US economy has its own apex monetary authority which is the Fed. The Fed is responsible for the creation as well as the destruction of money from the economy. The money will be created as a result of the multiplier effect in the economy. The multiplier effect explains the multiplier times change in the income due to an increase in the input. Thus, the Fed will inject the newly printed money into the economy which will have its own multiplier effect in the economy. This ...

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