The United States economy has grown from a variety of situations that are dictated by monetary policy. These policies assist in influencing the economy by changing the amount of money that is circulated within the economy. The circulation pattern must have some form of stability throughout the various market structures in order to maintain the Unites States. When the circulation flow is drastically altered and unstably implemented the economy can go into states of depression and recession. In this paper I will illustrate how money is created, what tools are used by the Federal Reserve to control the money supply and effects on macroeconomics factors such as GDP, unemployment, inflation and interest rates. I will then examine a possible balance between GDP, unemployment inflation and interest rates. This balance will be examined against our current economic state.
Creation of Money
Money is created by credit banks like the Bank of England and the Federal Reserve Bank in the United Sates. Originally the constitution stated that, Congress sets the value of money in the United States. The Federal Reserve Bank is separate from the government. In 1913 the Federal Reserve Act was passed and granted the Federal Reserve Bank authority to create money rather than congress. In the past Congress could print their own notes and use the money for the cost of the government. After the Act was passed they have to borrow with interest from the Federal Reserve Bank.
Federal Reserve Tools to Control Money Supply
The Federal Reserve Bank can control the money supply though it’s Federal Open Market Committee (FOMC). This committee is comprised of seven Governors, President of the Federal Reserve Bank and other Federal Reserve Bank presidents. There are three tools used by FOMC to constrict or expand the money supply. These tools consist of open market operations including buying and selling of U. S. government securities, altering reserve requirements...