[Author’s Name]
[Institution’s Name]
Essay on Microeconomic Principles and Policy
The Federal Reserve System, or “the Fed” for short, is our nation’s central bank. Since its beginnings in 1913, the Fed’s main mission has always been to establish and maintain the public’s confidence in the monetary and banking system of the United States.
The Central Bank attempts to achieve economic stability by varying the quantity of money in circulation, the cost and availability of credit, and the composition of a country's national debt. The Central Bank has three instruments available to it in order to control the money supply,
- Open market operations
- Reserve requirements
- The 'Discount Window'
As the money supply grows, so does the demand for goods and services. When more money is available, people tend to spend more. However, when the production of goods and services can’t keep up with the growth in demand, prices usually begin to rise—that is, inflation occurs.
If there is an indication that inflation is threatening purchasing power, the Fed may need to slow the growth of the money supply. It does this by using three tools—the discount rate, the reserve requirement and, most important, open market operations.
Conversely, if the money supply and the demand for goods decrease, people buy less; prices could fall and businesses would produce fewer goods. In this case, we could have an economic slowdown—or, worse, a recession.....
