Question

Explain the role of the Federal reserve bank in the US economy

Discuss how the policy makers use Fiscal policy to achieve macroeconomic stability

Answer 1

1) A Federal Reserve Bank is a regional bank of the Federal Reserve System and is the central banking system of the United States. It works with the board for the supervision of the commercial banks and implementation of the policy.

It's role include influencing the money supply and credit; supervising and regulation of the financial institutions; serving as a fiscal and banking agent for the U.S. government; and supplying services of payments to the public through depository institutions such as credit unions, banks, and savings and loans. The payment for services include transferring, issuing, and redeeming U.S. government securities, clearing and processing checks, and funds transfer. Thus it's main role are:

-- maintaining and providing an efficient and effective payments system

-- conduct the monetary policy for U.S. economy

-- supervision and regulation of banking operations

2) Fiscal policy can be used to close the (a) recessionary gap and (b) inflationary gap.

1. Recessionary Gap:

Expansionary fiscal policy eliminates the recessionary Gap. An increase in government purchases, decrease in taxes, or both results to rightward shift in the aggregate demand curve, thus restoring the economy to its natural level to real gross domestic product (GDP)

2. Inflationary Gap:

Contractionary fiscal policy eliminates the inflationary gap. It behaves opposite of expansionary fiscal policy, decrease government purchases, increasing taxes, or both results to leftward shift in the aggregate demand curve, thus restoring the economy to its natural level to real gross domestic product (GDP)