Federal Reserve Paper

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Federal Reserve Paper

FIN 366

Economics is the study of optimization of limited resources, apart from this money is required to produce prosperity and production. The Federal Reserve System is governments controlled body that acts as government’s central bank and whose primary responsibility is to manage the government controlled monetary policies (Investopedia, 2010). The following paper will explain the reasons behind government regulations. In addition to that, the paper will also look into the various functions of Federal Reserves, and the effect of its policies on financial market and institutions, and the impact on interest rates.

The Federal Reserve System has many functions; some of its main responsibilities include: organizing, standardizing and stabilizing monetary system by issuing currency, controlling the credit system, monitoring the commercial banks, and managing exchange reserves (Mullins, 2006). From a macroeconomic point of view, Federal Reserves are responsible for ensuring long term sustainability of nation’s funds, it provides the economy with funds when the commercial banks gets short on money. The bank regulates the monetary policies by buying and selling of government treasury bonds, and controlling interest rates, employment rates and manufacturing output by using following methods (Mullins, 2006): - Facilitating open market transaction thereby putting liquidity into the market or absorbing additional funds, thus directly affecting the inflation rate. - Increasing the flow of money by purchasing bonds, bills, and other government issued security notes and lowering the loan interest rates for commercial banks. Federal Reserve Bank, as a regulator of economic policies, formulates rules and norms that all banks and financial institutions are required to follow. The bank has the power to supervise and enforce these regulations to ensure overall economic development, and it also monitors activities of commercial banks to ensure that...
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