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The Role of the Federal Reserve

   

Added on  2020-06-05

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Discuss How Bank Behaviour and Federal BehaviourMay have Caused Money Supply Growth?
The Role of the Federal Reserve_1

TABLE OF CONTENTSINTRODUCTION...........................................................................................................................1MAIN BODY...................................................................................................................................1Discussing how Federal bank behaviour may cause money supply growth to be pro cyclical..1Before crisis............................................................................................................................3Post impacts of global financial crisis....................................................................................5Interpretation of graph.................................................................................................................7CONCLUSION................................................................................................................................9REFERENCES..............................................................................................................................10
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INTRODUCTIONIn the economies terms money supply or the supply of money is defined to as how muchmoney would be into the circulation or is existing within a country during a particular timeperiod. Both liquid money and money which is in form of demand deposits that are into the bankdeposits are to be included into this. So in this current essay we would be discussing about whatis the effect of recessions pre and post period on this money supply and how does the behaviourof Federal bank is causing all these things. Under this we would also be including theinterpretation of the calculation which are to be performed using the database of Federal bank onvarious aspects of it.MAIN BODYDiscussing how Federal bank behaviour may cause money supply growth to be pro cyclical.Federal Reserve Bank of St. Louis is the central bank of US which is making all the rulesand policies regarding to that of banking and financial sector of USA. This bank played a veryimportant role at the time of recession period of 2007-08 at the time when almost all theeconomies of world was shocked with global financial crisis. They are indulge into the practiceof making rules and policies that are to be affected whole economy and its financial systems areto be impacted. All the important things or phenomenon of the country like the money supply,inflation rate, currency rates, employment, demand and the business cycle would have beenaffected by policies which are to be made by the bank. In the year 2007-08 global financial crisishit the most important and biggest economies of the world that cause mainly due to sub-primemortgage markets of USA and then the collapse of Lehman Brothers in 2008 (The Fed and the2008 Financial Crisis, 2018). The global rate of inflation in 2008 was about 6.4% more than in2007 which is recorded to as the highest of this decade.1
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This was controlled only after the strong policies which government and national banksof various countries made, there was greater changes in the supply of money which is monitoredby both private and public sectors as this would surely be affecting exchange rate, business cycleand price level with economy. Both the supply of money and price level are having directrelationship with each other resulting in either recessions or boom within the economy this isknown to as quantity theory of money. The only source of money supply into the country isregarded to as the central bank of that economy which is the regulator and introducer of moneyand its flow in the economy (Staveley-O'Carroll, 2018). This phenomenon is having some majorcomponents that are categorised into parts:M0- which is the sum total of all currency including the coins into country over timeperiod Federal reserve notes+US Notes+coins.MB- this is the total amount of physical currency and the Federal reserve deposits that isonly the deposits of bank with the central bank + M0.M1- which could be defined to as total amount of M0 plus the other liquid money that aredemand deposits, cheques in economy and travellers cheques.2Illustration 1: GDP growth for 2008-2010[Source: Staveley-O'Carroll, 2018]
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