Question

Should the federal reserve system control the nations money supply ? Defend your position using economic principles.

Answer 1

The Fed can influence the money supply of the economy by modifying reserve requirements for commercial banks , it alters to the amount of funds banks must hold against deposits in bank accounts . By lowering the reserve requirements, banks are able to loan more money, which increases the overall supply of money in the economy . Also there are several other instruments of monetary policy such as open market operations, the discount rate etc .

Federal reserve system controls money supply through this monetary policy . There are certain advantages of monetary policy like : better inflation control without affecting GDP growth to higher extent , effect on economy is almost immediate causing avoidance of time-inconsistency trap .

So the FED should control money supply in order to protect from excessive inflation in time .