U.S. Economy and Federal Reserve

324 words | 2 page(s)

It is U.S. policy makers, particularly the Fed who affect the money supply. Fed affects money supply through three main tools though it uses each tool to a varying degree. The first tool is the required reserve ratio which determines the balance banks are required to keep with the Fed. The lower the reserve ratio is, the more money the banks can loan out and, thus, help increase money supply. The second tool is the discount rate at which the banks can borrow from the Fed. The lower discount rate means it’s cheaper to borrow and the banks respond by borrowing more and lending out more to businesses and private consumers, thus, increasing money supply. Similarly, raising the discount rate has the opposite effect. The third tool through which Fed affects money supply is open market operations. When the Fed wants to increase the money supply in the economy, it purchases government securities and when it wants to lower money supply, it buys them back (Pearson Education, Inc.). Thus, it is clear that it is not the general public but the Fed that primarily controls the money supply in the economy.

The internet research shows that U.S. Dollar has been depreciating against Chinese Yuan over the last year. The current exchange rate between U.S. Dollar and Chinese Yuan is approximately $1:Y6.04 while the exchange rate was a little over $1:Y6.21 a year ago (XE). This trend is better for U.S. businesses as opposed to Chinese businesses because it is making U.S. goods cheaper for Chinese customers and should boost U.S. exports to China as well as improve U.S. trade balance against China. When currency depreciates, it is a boon for exports which is why China works hard to ensure its currency doesn’t appreciate too much.

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  • Pearson Education, Inc. How the Federal Reserve Controls the Money Supply. 13 January 2014 .
  • XE. XE Currency Charts (USD/CNY). 14 January 2014 .

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