Federal Reserve and Money Supply

BUS305-0602B-01
Economics in a
Global Environment

Unit 5, Individual Project 2

"The Federal Reserve and the Money Supply"

By: Daniel Loran

Instructor
Professor Albert Alexander

Abstract: In this project, I will describe three ways the Federal Reserve can change the money supply, then discuss what changes would be made if there was an economic inflation, and economic recession. Finally, I will discuss the current condition of the economy in the United States, and what tools I would suggest using at the next meeting of the Federal Reserve based upon the data and trends.

I. Three Ways in which the Federal Reserve can change the Money Supply:

The three methods used by the federal reserve [Fed] to change the money supply in the country are
• Open Market Operations; and,
• Changing Reserve Limits on Banks; and,
• Changing the discount rate to banks.   (pp. 646)
  In Open Market Operations, the FED gives and takes back available money to the economy through its purchase of government bonds. When the FED buys bonds, such as a 100 million dollar bond, that money goes into the bond seller's bank.   The banking system can then loan that amount, minus the reserve requirement, to other consumers. To entice consumers to borrow that money, banks lower interest rates on loans. Consumers borrow the money, and then purchase and produce with the money. Conversely, when the FED sells bonds back into the economy, the reverse holds true. When the economy must cough up the money to buy the bonds from the FED, then that is money that cannot be used any longer by the firms or consumers to produce nor to loan and invest.   It is money returned ‘out of the system'.   Interest rates rise, to compensate for the lost revenue of making loans on money, and spending decreases due to less money.
  When the FED changes the reserve requirement, the percent of reserve the Banks simply cannot spend or loan to consumers is raised or lowered. If a bank has 10 billion on... [continues]

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