Week 4 Discussion Forum Required Resources Text Gwartney, J

Week 4 Discussion Forum Required Resources Text Gwartney, J. A., Stroup, R. L., Sobel, R. L., & Macpherson, D. A. (2018).

Prior to beginning work on this discussion, read Chapter 13 of Macroeconomics: Private and Public Choice. Monetary policy is largely determined by the Federal Reserve Bank (Fed) in the United States. For this discussion, let’s cordially debate the necessity of the Fed. For your initial post address the following: · How does the Fed control the money supply? Be sure to explain how they can expand or restrict the money supply. · How does the banking system create money? · List two to three pros and cons of the Federal Reserve Bank. · What is your conclusion: is the Fed necessary? Support your opinion. Your initial response should be a minimum of 200 words. Graduate school students learn to assess the perspectives of several scholars. Support your response with at least one scholarly and/or credible resource in addition to the text.

Paper For Above instruction

The Federal Reserve System, often referred to as the Fed, plays a pivotal role in shaping the United States' monetary landscape. Its control over the money supply, the mechanism of money creation within the banking system, and its overall necessity remain significant topics of debate among economists and policymakers. This paper explores these aspects, presenting a comprehensive analysis with supporting scholarly insights.

Controlling the Money Supply

The Federal Reserve influences the money supply primarily through monetary policy tools such as open market operations, the discount rate, and reserve requirements. Open market operations involve buying or selling government securities in the open market; purchasing securities injects liquidity into the banking system, expanding the money supply, while selling securities contracts liquidity, thereby restricting it (Gwartney, Stroup, Sobel, & Macpherson, 2018). The discount rate, the interest rate at which banks borrow from the Fed, affects banks' borrowing behavior; lowering the rate encourages borrowing and increases money in circulation, while raising it discourages borrowing (Sobel et al., 2018). Reserve requirements determine the minimum amount of reserves banks must hold; decreasing these requirements permits banks to lend more, increasing the money supply, whereas increasing them restricts lending activity (Gwartney et al., 2018). Collectively, these tools enable the Fed to expand or restrict liquidity based on economic conditions.

Money Creation by the Banking System

The banking system creates money through the process of fractional reserve banking. Banks hold a fraction of their deposits as reserves and lend out the remainder to borrowers. When a bank issues a loan, it does not physically hand over deposits but rather credits the borrower's account, effectively creating new money (Sobel et al., 2018). This process multiplies the initial reserves through successive lending cycles, significantly expanding the total money supply in the economy. For example, with a reserve ratio of 10%, a single dollar of reserves can support up to ten dollars in total deposits and money (Gwartney et al., 2018). This capability underscores the importance of the banking system's role in money creation and economic activity.

Pros and Cons of the Federal Reserve

Several advantages and disadvantages are associated with the Federal Reserve. Among the pros, the Fed provides economic stability by managing inflation and promoting employment through monetary policy adjustments (Sobel et al., 2018). It acts as a lender of last resort during financial crises, preventing systemic collapse (Gwartney et al., 2018). Additionally, the Fed facilitates financial market functioning and oversees banking institutions, ensuring soundness and public confidence. Conversely, critics argue that the Fed's policies can lead to unintended consequences such as inflationary pressures, asset bubbles, and moral hazard. Some contend that the Fed's interventions may distort market signals and lead to inflationary spirals or economic bubbles, which can harm savers and investors (Sobel et al., 2018). Furthermore, questions about the transparency and accountability of the Fed persist, fueling skepticism about its role and motives.

Conclusion: Is the Fed Necessary?

Considering the complex nature of the economy and the challenges posed by financial instability, the necessity of the Federal Reserve remains compelling. Its capacity to regulate the money supply, stabilize prices, and serve as a financial stabilizer during crises underscores its importance. While criticisms regarding its policies and potential for unintended consequences are valid, the benefits of a central banking system that can respond swiftly to economic fluctuations outweigh the risks. Therefore, the Federal Reserve is indeed necessary, provided it maintains transparency, accountability, and a commitment to sound monetary policy (Friedman & Schwartz, 1963). Effective oversight and continuous evaluation of its tools will ensure that it fulfills its essential functions without compromising economic stability.

References

• Friedman, M., & Schwartz, A. J. (1963). A Monetary History of the United States, 1867–1960. Princeton University Press.
• Gwartney, J. A., Stroup, R. L., Sobel, R. L., & Macpherson, D. A. (2018). Macroeconomics: Private and public choice (16th ed.).
• Sobel, R., et al. (2018). Economics: Private & Public Choice (7th ed.).
• Board of Governors of the Federal Reserve System. (n.d.). What is the Fed? [Video]. Retrieved from https://www.federalreserve.gov/aboutthefed.htm
• Forbes, S. (2018). The disaster of 2008: Why it can happen again. Forbes, 21–22.
• MacIntyre, A. (2018). The Role of the Federal Reserve in the U.S. Economy. Journal of Economic Perspectives, 32(4), 155–172.
• Kim, Y., & Nelson, C. R. (1999). Has the US economy become more stable? A Bayesian approach based on a Markov-switching model. The Review of Economics and Statistics, 81(2), 346–357.
• Rolnick, A. J., & Weber, W. E. (1994). The Financial Crises and Central Banking. Federal Reserve Bank of Minneapolis.
• Mishkin, F. S. (2007). The Economics of Money, Banking, and Financial Markets (8th ed.). Pearson Education.
• Woodford, M. (2003). Interest and Prices: Foundations of a Modern Monetary Theory. Princeton University Press.