Federal System (Fed)

Federal System (Fed)

This is the United State’s central bank. It was constituted in 1913 as a remedy to tackle economic turbulence which threatened the collapse of the US economy. The bank is a public institution tasked with the role of maintaining a safe and efficient financial framework. It undertakes monetary policy, which is used to serve citizens by cushioning them against harsh economic times, for instance, sustaining inflation rates.  The Fed also serves higher goals of the government of managing the economy, for example, liaising with fiscal authority to harmonize and integrate monetary and budgetary policy appropriately. All the procedures culminate to an efficient financial and economic system which serves the nation by creating a favourable economic environment for households, enterprises and government.

Various financial schools of thought assist in managing the Fed institution.

Finance theories

Keynesian: This is an economic concept that stipulates that demand is the driver of growth in an economy. The method was first coined by Maynard Keynes in the 1930s when the great depression posed a threat by contracting the US economy. Wages deteriorated, and inflation rates escalated to unmanageable levels during the depression. Keynes encouraged consumption as a tool to spearheaded growth during a critical time when the economy is on a downturn. Therefore, the concept advocates for expansionary fiscal and monetary policy to engineer the growth of an economy.

Application: In times of slower economic growth, I would use expansionary monetary policy instruments to revive the economy.

This will encompass:

> decrease of interest rates to make loans cheap for investors;

> buying of securities in open market operations to increase funds in the marketplace which business can use to expand operations, and

> decrease compulsory bank deposit so that more can be available for lending by commercial banks. All this would supply funds to the economy and speculators can easily invest in capital formation and other commercial purposes hence expanding the economy.

Classical concept; This that invisible hand is the best in economic regulation. It advocates for a free-market economy with minimal government regulation, arguing that it will increase efficiency. This is a better concept for an economy because the liberalized an economy is the more it tends towards a perfect market hence eliminating market imperfections.

Application: I would utilize the financial concept in the Fed to remove any fixed components in the exchange rate regime and institute a flexible exchange rate system so that higher efficiency level can be attained in the financial order. This would help in lowering inflation and increasing stability. The elimination of volatility will ensure the economy doesn’t harm citizens.