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Submitted by lando77 on September 17, 2007
Category: Business
Words: 1926 | Pages: 8
Views: 150
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Macroeconomic Impact on Business Operations
The Federal Reserve System (the FED) is the Government agency that oversees and regulates the U.S.’s money supply. Its primary purpose is to balance the supply of cash and credit with the needs of the Nation’s economy. The Fed consists of 12 Federal Reserve Banks and an eight member Board of Governors. (The Federal Reserve Bank of St. Louis [FRBSL], 2006, p. 5) The Board utilizes three tools to influence the money supply in the US, Open Market Operations, the Discount Rate, and Reserve Requirements. (McConnell & Brue, 2005, 242)These tools influence the amount of money created and distributed in the economy, create balance between economic growth, low inflation, and a reasonable rate of unemployment. This paper will attempt to demonstrate how money is made, the history of the FED, how the FED pulled the US out of the recession following the Stock Market bubble, and 9/11 attacks, and present criticism of the FEDS actions.
History of the FED
How Money was Made
US Banks previously utilized the fractional reserve banking system by the issuing of currency based on a portion of deposits in reserve in banks vaults. In the 19th century, banks created money by issuing receipts of gold deposited in a banks vault. These receipts were accepted currency, and banks would create money by loans based on a portion of gold reserves in the banks vaults. As long as only a small number of holders made withdrawals for gold, the bank could continue its daily operations. But, a bank panic would occur if the all holders of these receipts would demand gold at the same time because the bank did not have enough gold to cover the amount of receipts it had distributed (McConnell & Brue, 2005, p. 253). Banks are primarily a for-profit business and bank managers would often consider the needs of the bank rather than the economy or communities it served. This would often lead to an inappropriate amount of...
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