Please thoroughly explain the major functions of the Federal Reserve and discuss why the money supply curve is vertical.

 

The Federal Reserve System is the central bank of the United States. The Federal Reserve's income is derived primarily from the interest on U.S. government securities that it has acquired through open market operations. It was created after a series of financial panics that led to the desire for central control of the monetary system in order to alleviate financial crises on December 23, 1913, with the enactment of the Federal Reserve Act. To promote the effective operation of the U.S. economy and more generally, the public interest, it performs five general functions;

1. Promotes the financial system's stability and seeks to minimize and contain systemic risks through active U.S. and overseas monitoring and engagement- To achieve economic stability, the federal reserve uses various strategies. Expansionary monetary policy is used by the Federal Reserve when it reduces interest rates. This makes loans cheaper, stimulates business development, and decreases unemployment. Banks fix their own effective rate of fed funds. The Fed uses open market operations to buy or sell securities from its member banks to keep it near its target. Achieving or sustaining full employment, achieving or maintaining a high economic growth rate, and stabilizing prices and wages are the normal objectives of monetary policy. In controlling the money supply, the Fed uses three primary instruments: open-market operations, the discount rate, and reserve criteria. The Fed's rationale is that by maintaining price stability, this inflation objective produces a healthy economic climate capable of promoting the target of maximum employment. Stable markets and long-term interest rates are priorities of the Federal Reserve that impact one another directly, making them basically one mandate.
2. Conducts the monetary policy of the nation to facilitate maximum employment in the U.S. economy, stable prices and low long-term interest rates- The Federal Reserve works to promote a strong U.S. economy. Specifically, the Congress has assigned the Fed to conduct the nation's monetary policy to support the goals of maximum employment, stable prices, and moderate long-term interest rates. Monetary policy affects an economy's cash supply, which impacts interest rates and the rate of inflation. It also affects market growth, net exports, wages, debt costs, and the relative cost of consumption versus saving, all of which influence aggregate demand directly or indirectly. To foster full employment, price stability and economic growth, deliberate adjustments in taxes (tax rates) and government spending by Congress. Reducing unemployment is the aim of an expansionary fiscal policy. The tools would then be to increase government spending and/or to minimize taxes.
3. Promoting the security and soundness of individual financial institutions and the monitoring of their effect on the overall financial system- A wide variety of financial institutions and operations are supervised and regulated by the Federal Reserve System. Along with other federal and state agencies, the Federal Reserve works to ensure that financial institutions securely conduct their activities and provide customers with equal and equitable services. In reaction to particular legislation passed by Congress, the Fed's rules are also implemented. The Fed, through the Board of Governors, as one of the nation's bank regulatory agencies, sets standards of activity for banks through legislation, rules, policy recommendations, and interpretations of applicable laws. Examinations and inspections are conducted by Federal Reserve examiners, professionals who work at local Federal Reserve Banks. The Federal Reserve System Board of Governors has supervisory and regulatory powers over a wide range of financial institutions, including state-chartered banks belonging to the Federal Reserve System (state member banks), bank holding companies, thrift holding companies and foreign banking companies. Regulation is necessary to reduce or eliminate that risk. system. Regulation protects the Fed against losses that will occur when it lends to banks that later fail.
4. Promotes the safety and effectiveness of payment and settlement systems through services that facilitate U.S. dollar transactions and payments to the banking industry and the U.S. government- For the U.S. economy, an effective, efficient, and secure U.S. and global payment and settlement system is vital, and the Federal Reserve plays an important role in helping to maintain the integrity of that system. Payment instruments and methods, systems, and institutions that have changed over time are part of the U.S. dollar payment and settlement system. Currency is provided and some elements of this system are operated by the Federal Reserve. This system, on behalf of individuals and institutions, buyers and sellers, consumers and businesses, investors and securities issuers, facilitates financial transactions and purchases of goods and services and the attendant movement of money at all levels of the U.S. economy and promotes interactions between the U.S. economy and others around the world. The importance of the payment system and a sound currency in our daily lives and interactions makes its safe and proper functioning essential to the health of the U.S. financial system and overall economy.
5. Promotes the protection of consumers and community development through consumer-focused supervision and examination, research and analysis of emerging consumer issues and trends, community economic development activities, and the administration of consumer laws and regulations- The Federal Reserve is committed to ensuring that consumer and community perspectives inform the policy, research and actions of the Federal Reserve, with the mission of promoting a fair and transparent marketplace for consumer financial services and effective community development, including for households and neighborhoods that are traditionally underserved and economically vulnerable. Another purpose of the Fed is to protect customers during loan and deposit transactions. Not only do Fed examiners ensure that credit costs and interest rates are correctly reported, but they also make sure they are clearly stated. In one area of business-debit cards, the Fed also oversees credit card firms. Open market operations consist of the Fed's acquisition and sale of government securities. It raises the money supply in the hands of the public if the Fed buys back securities (such as Treasury bills) from banking industry and securities dealers. Conversely, when the Fed sells a security, the money supply decreases.

Why the money supply curve is vertical

The money supply curve is vertical since without regard to the value of money, the Fed sets the amount of money available. The curve of money demand slopes downwards and as the value of money declines, customers are forced to bring more cash to make transactions because it costs more cash for goods and services. Similarly, when the value of money is high, since products and services can be obtained at low prices, customers demand little money. Both the equilibrium value of money as well as the equilibrium price level are shown by the intersection of the money supply curve and the money demand curve. In the end, the value of money is determined by the intersection of the supply of money, as regulated by the Fed, and the demand for money, as generated by customers. The value of money is unpredictable, as revealed by the money market. A rise in money demand or a change in the supply of money would result in a change in the value of money and the amount of the price.