The Federal Reserve aims to promote the United States economy. The Federal Reserve conducts the state’s fiscal policy as per the directives of the Congress. The aims are to support three main goals which include maintenance of stable prices, creation of maximum sustainable employment opportunities and moderating the long term interest rates. To achieve its purpose on the monetary policy mandate, the Fed tries to influence the interest rates together with the general financial conditions by keeping the interest low. When there is a need for utilising money, it implies that the values of commodities are skyrocketing thereby making consumers have low purchasing power. In the long run, it causes scarcity of choices.
- Parts of the mission of the federal/US central Bank
The central bank aims to foster stability and integrity as well as the efficiency of the national monetary system together with the financial systems to assist in promoting optimal macroeconomic performance. The two parts are different since one results to the other. The efficiency cannot be achieved without having integrity within the monetary system.
The financial institutions always keep the customer’s deposits available in cash to facilitate immediate withdrawals. A bank run is an event in which the bank customers will try to withdraw funds than what the bank can offer. The central banks always limit the number of funds that the banks should have within their safes in liquid form. Therefore the bank can increase the amount to reduce the risk of having occurrences of bank runs.
Lender of last resort
Lender of last resort is in most cases the central bank which offers loans to the banks and any other eligible financial institution that experiences financial shortages and in a situation nearing collapse. The Federal Reserve in the United States acts as the lender of last resort to the financial institutions that have deficits or in case they fail to obtain credit; their collapse would affect the economy.
Insolvent and liquid banks
A bank is considered insolvent if it is not in a position to meet its obligations as they fall due even if the assets are more than the liabilities. Liquid commercial banks are the financial institutions that make profits by taking small short term deposits which are regarded as relatively liquid.
- Gold standard
A gold standard is a monetary system of whereby the country’s currency system or the paper money possess a value that is linked directly to gold.
The demerit of the lender of last resort
The negatives that the lender of last resort possesses is that the interest rates advanced are relatively high due to the high-risk profile of the debtors.
Role of the monetary policy during the great depression.
The monetary policy is to ensure that there is enough money in circulation. Therefore, the monetary policy’s role during the great depression is to print enough currencies to help in cushioning the deficit.
Role of the lender of last resort during the great depression
The lender of last resort protected individuals who had their funds deposited in the banks from withdrawing too many funds and also preventing customers from withdrawing funds out of panic. The Fed while operating as the lender of last resort was to provide window funding to the insured depository institutions. During the period, the interest rates are above the normal, and the loans are given are backed by collateral which is sufficient to protect the taxpayer from incurring losses.
- Interest rates after world war 2
The aftermath of World War 2 was an increase in interest rates.
Leaving the control of the Fed under the president may bring much political influence in the treasury. The move is dangerous since the Fed can be manipulated to finance large budgets deficits for the reason of purchasing treasury bonds which may, in turn, result in more inflation in the economy.
The tradeoff between unemployment and inflation let to economists using the Philips curve to fine tune the fiscal policy. The Philips curve shows the specific level of inflation for a given rate of unemployment.
Deflation is a general decline in the prices of goods and services. It happens when the supply within the economy remains fixed. Deflation is good since it increases the currency’s purchasing power. Before the 1970s, the inflation rate was high which made the central bank to increase the lending rates thereby reducing the circulation of money. As a result, the purchasing power of consumers increased. The political pressure existed during the time since the inflation effects were felt economy-wide and the unemployment rate was also high. It is not easy for the United States to have such high inflation due to the policies put in place by the central bank.