The Federal Reserve System

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The Federal Reserve System is the central bank of the United States that performs the general functions to help promote the effective operation of the country’s economy. According to their website, one of the said functions it performs is conducting the nation’s monetary policy. This will help promote maximum employment, stable prices and moderate long-term interest rates in the U.S. economy (Fereral Reserve, 2018). Money supply is the total stock of money held by the public, in an economy. At a specified point of time, Money supply is considered fixed, as it stands now, the fixed amount of money supply is decided by the Fed. The intersection of money supply & money demand curves will determine the interest rate. Now let us assume, Federal reserve gives up all controls over the money supply. It is allowed to freely move up & down.         If Federal Reserve does not control the money supply, then an economy cannot avoid high inflation or recession. Our economic principle says that wants are unlimited but resources are limited. In a similar manner, the money in the economy is limited, if this is not controlled by an institution then the whole system of trade, saving, investment will not make any sense.        A high inflation rate erodes the purchasing power of money. So, the savings balances held by the public will see an erosion in the value. Also, there is uncertainty during a consistently inflationary period, especially a period that is not intervened by any regulatory authority. Investors do not know which direction the inflation and economy will go, in absence of any checks and balances. Thus, they will be reluctant to invest, which will harm the country’s growth & GDP.

ReferenceFederal Reserve. (2018). Board of Governors of the Federal Reserve System. Retrieved from          https://www.federalreserve.gov/aboutthefed.htm