Question

1. Describe the overall structure of the U.S. Federal Reserve System. Be sure to provide at least 5 characteristics of the Fed in your response. An example of one of the many characteristics is that the Fed was created under the Federal Reserve Act of 1913. This is what I am looking for (simple and basic fact) but please do not use this one (1913) anymore........ Be creative on your own answers and be sure to elaborate on your answers as well. 2. Define Barter System. Be sure to provide an example of what participants under such system would have to do for transactions to be completed. What is one major inefficiency of the Barter System? 3. What are the tools available to monetary policy makers to manipulate money supply in the economy? Specifically, what would policy makers do if the economy is experiencing a "recessionary GDP gap?" 4. Define and elaborate the following terms in your own words: (a) Federal Funds Rate (b) Discount Rate (c) Prime Rate

Answer 1

1) Structure of Federal Reserve System----

Fed is the central bank of US.,which provides the nation with stable monetory and financial system

Fed has decentralised operating structure of 12 reserve banks

The fed reserve board is the national component of fed Reserve system

The board consists of 7 governors appointed by US president and confirmed by Senate.

# 5 Characteristics of FED--------

1) Fed ' s open market committee sets U.S monetary policy to stabilise economy.

2)Fed supervices and regulates financial institutions anf their activities.

3) It works to promote safe and efficient payment and settlement system.

4)With the use of instruments of monetary policy ,fed controls inflationary and recessionary gaps in economy.

5)Fed exercises supervisory control over financial services Industries.

2) Barter system---

It is a system in which people in a transaction directly exchange goods and services for other goods and services .Under this system, there is no money as medium of exchange.

Example-------suppose a farmer takes services of workers in harvesting and household work .If he gives them some crop from his farms for their services ,it is called barter system ,as no money is involved in the transaction.

One drawback-------

Lack of double coincidence of wants ----- It means bartering involves the provision of one good or service by one party in return for another good or service from another party.

3) Tools of monetary policy to combat recessionary GDP gap-----:

* lowering Fed Interest rate ---- It is the rate at which central bank provides funds to commercial banks.To overcome recession,fed reduces rate of interest so that more money can be dupplied in economy by lower borrowing cost.

* Open market operations( OMO)---- Fed buys govt securities under OMO to increase supply of money to combat recession

* Legal reserve Requirements -----

Lowering Statutory liquidity ratio- The percentage of total assets ,which a commercial bank is required to keep themselves.If this ratio is lowered, more money can be provided to borrowers.

Reducing Cash Reserve Ratio --- A percentage of deposits which a commercial bank is required to keep with central bank.To control recession, this ratio is lowered ,so that more funds are available for loans seekers.

4)

a) Federal Fund Rate----- It is the rate of interest that a bank charges from other banks for an overnight loan from their reserve balances.

b)Discount Rate----

It is a rate at which fed provides loans to commercial banks. It is also called bank rate.

c)Prime Rate-----It is a lowest lending interest rate which ,a bank charged from his most preferred customer ,or say from a customer with very high credit worthiness.

d) FOMC------Federal Open Market Committee(FOMC) is a branch of fed Reserve board ,which directs fed in regards to monetory policy implementation.

e) FDIC-----Federal Deposit Insurance Corporation(FDIC), is an independent fed agency created in 1933.It is engaged in insuring deposits of US banks.

5) Three major functions of money---

* Money as a medium of exchange ----- It facilitates transactions .Suppose I need bread im my breakfast, i know i can buy it with 3$ ,i just go to bakery and buy it ,the seller will happily accept its price in terms of dollar .Otherwise in barter system ,I would fetch a person who sell me bread in exchange for some good or sevice which I am willing to exchange.

*Store of value------ Money holds its liquidity value overtime.It is not perishable good,unlike barter system where a perishable vommodity does not work because ,it looses value overtime.

*Unit of account----Money provides a common measure of value of goods and services.It cannot be rejected because of ones own perspective of valuation of good or service.

If a burger is for $5 , it is acceptable to all as a common measure.

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