Week 4 Discussion 1 & 2 Classmate Response

Week 4 - Discussion Forum

Guided Response: In your response take the opposing view of the original post. Respond to at least two of your fellow students’ and to your instructor’s posts in a substantive manner and provide information or concepts that they may not have considered. Each response should have a minimum of 100 words. Support your opposing view by using information from the week’s readings. You are encouraged to post your required replies earlier in the week to promote more meaningful and interactive discourse in this discussion forum. Continue to monitor the discussion forum until Day 7 and respond with robust dialogue to anyone who replies to your initial post.

There two of my classmate’s discussion that need responded to. Kristopher Wentworth and Timothy Johnson

Kristopher Wentworth

The Fed controls the money supply in several ways, the first being, they increase the supply of money by lowering the reserve requirements for banks. They do this so then they can lend more money. The Fed can also change the interest rates of short term loans and by doing lowering or raising these rates they are changing the liquidity of the money supply and boost economic activity. Then the Fed can also do business in the open market which basically means that the government buys and sells government securities. Banks create money when they make loans and in the form of bank deposits. only about 3% of u.s. currency is actually physical cash the rests are 1's and 0's. There are many benefits to having a federal reserve and the most important is that it establishes and maintains a consistent currency across the entire country. It is a representation of a strong financial system and means that banks can be subject to federal audits. There are, however, some preserved cons and one of those is that some people believe the system actually increases instability. As I explained earlier people view the fact that they can set interest rates as a negative and arguably it is. In my personal view I would like the Fed, and government for that matter, to have less control over my life and the lives of my fellow Americans I believe that for they most part they are necessary.

 

Gwartney, J., Stroup, R., Sobel, R., & Macpherson, D. (2008). Macroeconomics: Public and Private Choice. Cengage Learning.

Federal Reserve. (n.d.). Overview of the Federal Reserve System. 

Timothy Johnson

The Fed controls money by multiple means. One of the most powerful is the FOMC. The Federal Open Market Committee (FOMC) a committee that determines policy for the purchase and sale of government bonds and other assets (Gwarty, 2018). Another is the reserve ratio policy that requires banks to hold a certain amount of cash based on the amount in deposits that it holds. This policy affects the lending power of a bank. Another way is one that is relevant today with the discount rate that the fed charges commercial banks to borrow more reserves. Currently the discount rate is .25 percent. The tools mentioned are used to create money by using new money, the FOMC, reserves, and fractional banking. The Federal Reserve Bank holds all this power for some important reasons. The primary reason is for stability. The Fed’s policy is what creates this stability. This stability helps control risk. In addition the Fed uses the power of its choice of currency to keep this power centralized. A problem with this power is that is seems to be more powerful that the elected officials that the people choice to govern them. The Fed is not necessary for the economy to function but it has shown its ability to stabilize economies and for that reason alone it is worth having. Until another form of money is realized then the Fed should continue its operation. The introduction of new currencies such as cryptocurrencies however may eventually make the fed obsolete.

Gwartney, J. A., Stroup, R. L., Sobel, R. L., & Macpherson, D. A. (2018). Macroeconomics: Private and public choice (16th ed.). https://www.cengage.com