Question

Briefly explain what a central bank is and what its most important task is. Discuss the U.S. central bank, including a brief explanation of what is involved in its decision making about the money supply and its ability to affect some goals of macroeconomic policy; including examples of some macroeconomic policy goals that would be affected. Conclude by explaining what is involved in its policies relating to the money and banking system.

Answer 1

In United States, Fed is the central bank. Congress created Fed to provide the country with a purpose of providing a flexible, safer, and stable financial and monetary system. The important tasks of Fed included issuance of currency; lending to financial institutions & performing the role of an emergency lender; banks supervision; setting and holding requirements for the reserve; acting as a fiscal agent; control of money supply; and providing for check collection.

Monetary policies are the actions taken by Fed for controlling the monetary as well as financial status with the target of attaining low rate of inflation and sustainable economic growth in the country. Expansionary monetary policy is applied by FED when it wants an expansion (increase) the supply of money for stimulating the economic activities. An expansionary policy targets to stimulate investment and consumption spending, and also decreases the rates of interest thus causing the aggregate demand curve to shift right. Contractionary monetary policy would be applied by FED when it targets to contracts (decrease) the supply of currency of the nation. It reduces the supply of money, increases rates of interest and decreased the aggregate demand