FEDS
... operation to purchase treasury securities. In that way, cahs increases I the financial system, expanding bank reserves, and lowering the federal funds rate. This action is taken to prevent or stop a recession. M1, and M2 increase through the money multiplier or m1/monetary base. On the other hand, if the money supply is growing too fast, causing raising prices, the Fed will use its open market operation (FOMC),to sell securities of the department of treasury, thus contracting the monetary base. The Federal Reserve will raise the federal fund rate, thus preventing the event of inflation. The reduction of the bank’s reserve, will cause the economy to slow down, and the money supply, and demand will set its equilibrium.M1, and M2 will contract or reduce. The Federal Reserve discount rate is the interest rate that banks charge each other when they lend, and borrow. The Fed lends reserves to banks at the discount window. ( Stockman, 1999 ) Fed increment or decrement of discount rate to banks, will have an impact or effect in the money supply on the economy because so the required reserves of banks will be affected, and the loans will be reduced or increased to public business, consumers, and institutions as a whole. The Federal Reserve needs to ensure that the payment system of the U>S. supports economic growth, management risks, and provide a rang of payment-related services. For example, the Federal Reserve acts as a clearing house to clear checks, and distributing new currency. The Federal Reserve’s cash services are integral parts of its responsibility to provide for an elastic currency. The Fed wire funds transfer system make possible the final settlement of interbank payments in central bank money, thus giving liquidity to the economic deve...