Question
Assume that the U.S. economy just entered into a recession. What can the Federal Reserve do to try to get the economy out of a recession? Among other comments that you may make, please be sure to discuss the following:
Describe the role of the Federal Open Market Committee of the Federal Reserve in the United States, and describe the tools available to the Federal Reserve to influence the nation’s money supply.
Discuss the Federal Reserve’s open-market operations, and the importance of its role. How does another key central bank around the world conduct such operations, and why are they important? What recent open-market operations have the Federal Reserve and another country’s central bank taken?
Explain what happens to the U.S. money supply when the Federal Reserve buys and sells Treasury bonds. Describe in detail how this has affected U.S. banks’ abilities to lend and the overall U.S. economy.
Explain what has happened to the U.S. money supply and economy when another central bank outside the United States has bought and sold U.S. Treasury bonds.
How do you think that you will be personally impacted by the recession?
Sample paper
Government Bonds Markets
It is the dream of every country and government to boost and improve the economy of the country. In most cases, the central banks of different countries are given the duties and the powers to ensure that they increase employment opportunities in the country and keep inflation at its minimum level which is essential to the economic growth and development. However, this is not always the case considering that the economy of any country faces the four economic cycles that include boom, recession, trough, and recovery. During the recession period when the general economic activity and growth starts to slow down, the federal reserve has a duty to formulate and implements policies and strategies that can help to boost the economy to prevent the next stage which is trough when the economy is stagnant and at its lowest point (Rowland, 2010). During the recession period, the gross domestic product of the country, venture spending, limit use, family wage and business benefits falls while there is a rise in the level of unemployment and bankruptcies. This assignment will attempt to establish measures that are at the disposal of the federal reserve and can help to get the economy out of recession.
The federal reserve has several methods and techniques by which it can help to rescue the country’s economy from recession. Among these methods include the increase or decrease in the interest rates which either encourages or discourages borrowing as per the economic circumstances in the country. Additionally, the reserve can also decide to buy or sell the united states government through the purchase of treasury bill and notes which help to either increase or reduce the amount of money supply in the country this controlling inflation and unemployment which are major contributors to an economic recession (“Framework of Federal Reserve Monetary Control,” n.d). Moreover, the federal reserve can increase the lending for banks, thus providing funds for consumer loans and consequent consumer buying which a major component that helps to drive the economy of a country. Finally, the central bank can help solve the unemployment problem by providing funds at a lower interest which enables ordinary citizens to borrow for investments thus reducing the rate of unemployment in a country. As more and more people invest, the gross domestic product of the country increase thus boosting the economy.
Considering the importance of the federal reserve to the country, the responsibility of controlling the country’s finances cannot be rested on a few individuals and that is the primary reason for the formation of The Federal Open Market Committee (FOMC). The FOMC is a federal reserve board that determines the direction of the monetary policy, such as Open Market Operations (OMO) which involves the purchasing and offering of central government securities to control the measure of cash available for use in the nation. The fed regularly sets focuses for the government subsidize rate and afterward leads operations to keep up that rate (Chappell, McGregor, & Vermilyea, n.d). When there is the need to increase the money supply, the feds purchases the bonds in the open market, thus giving the bondholders more money to spend which is then circulated in the economy. On the other hand, when there is the need to reduce the money supply the federal reserve sells the federal bonds in the open market by accepting large sums of money from the general public, public and private companies. The sale of the bonds helps reduce the amount of money at their disposal which in turn reduces the amount of money in circulation. Notably, the FOMC has the mandate and responsibility to decide on an objective government subsidize rate by assessing fiscal targets, for example, expansion, loan fees or the trade rates in the country.
When the federal reserve decides to sell the treasury bills and notes in the open market, the market if often opened even to foreign citizens, countries, and governments. One of the countries that have been purchasing the united states bond in large quantities is China. However, this sale to foreign countries and governments have negatively affected the value of the United States dollar. When foreign govern such as China buys these bonds, but later sells them in their country, there is the risk of devaluing the dollar in these countries by having too many dollars in their economy, which in turn increases the interest rates in the United States and substantially affects the stock market. Therefore, when bonds are sold to a foreign country, there is the risk of collapse of the united states economy if these bonds are not carefully controlled. On the other hand, if not addressed quickly recession can lead to loss of employment, reduction of income and bankruptcy considering that there is little or no money to buy goods and services which are the backbone of economic growth and development of any country (Jenkins, 2013).
From the above research, it is easy to point out that the federal reserve plays an important role in controlling the money supply in the United States, which gives it the power and the ability to boost the economy of the country during a recession period. Through the sale of government bonds, the federal reserve can either increase or reduce the money supply in the country which in turn affects the inflation, employment and exchange rate which drives the economy.
References
Chappell, H., McGregor, R. R., & Vermilyea, T. A. (n.d.). Committee Decisions on Monetary Policy: Evidence From Historical Records of the Federal Open Market Committee. ICPSR Data Holdings. doi:10.3886/icpsr23860
The Framework of Federal Reserve Monetary Control. (n.d.). The Financial Crisis and Federal Reserve Policy. doi:10.1057/9781137401229.0014
Jenkins, S. P. (2013). The great recession and the distribution of household income. Oxford: Oxford University Press.
Rowland, M. (2010). The new commonsense guide to your 401(k): Rebuilding your portfolio from the bottom up. Princeton, NJ: London.
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