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Federal Reserve and Monetary Police Term Paper

Monetary policy affects the economic and financial decisions of virtually all of us from workers to borrowers to investors (Rukeyser 105). Louis Rukeyser wrote, If we want monetary policy to play its proper role in a true national economic reconstruction, the authentic task is to get the Fed to stop bouncing like a Chinese Ping-Pong ball, switching every few months between the inflationary effect of pumping far too much money into the economy and cramping, recessionary effect of supplying far to little (Rukeyser 104). And, because the US is the largest economy in the world, its monetary policy also has significant economic and financial effects on other countries. The object of monetary policy is to influence the performance of the economy, as reflected in such factors as inflation, economic output, and employment. It does so by affecting demand. Most people are familiar with the fiscal policy tools that affect demand, such as taxes and government spending. Less familiar is monetary policy; it is conducted by the Federal Reserve System, the nation's central bank, and it influences demand mainly by raising and lowering short-term interest rates. The Federal Reserve System (the Fed) is the nation's central bank. It was established by an Act of Congress in 1913 and consists of the seven members of the Board of Governors in Washington, DC and twelve Federal Reserve District Banks. Congress structured the Fed to be independent within the government. What that means is although the Fed I accountable to Congress, it is insulated from day-to-day political pressures. This reflects the conviction held both the US and in many other countries that the people who control the country's money supply should be independent of the people who frame the government's spending decisions. Most studies of central bank independence rank the Fed among the most independent in the world (World 68). Each reserve bank President is appointed to a five-year term by that bank's Board of Directors, subject to final approval by the Board of Governors. This procedure adds to independence, because the directors of each reserve bank, who are not political appointees, provide a regional cross-section of interests, including depository institutions, nonfinancial businesses, labor, and the public. The Fed is structured to be self-sufficient in the sense that it meets its operation expenses primarily from the interest earnings on its portfolio of securities. Therefore, it is independent of Congressional decisions about funding. Even though...

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