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Macroeconomic Impact
In order to achieve stability in the nation's economy, the creation of a centralized banking system was put into place to target double digit inflation. The Federal Reserve System was created 1913 with the hopes of increasing the supply of currency.
Monetary Policy
Monetary policy is the process by which the government, central bank or monetary authority manages the money supply to achieve specific goals. These goals include constraining inflation, maintaining an exchange rate, achieving full employment or economic growth (Monetary policy, Wikipedia). There are two forms of monetary policy, expansionary and contractionary policy. In expansionary policy, the Federal Reserve Bank ("Fed") is used to fight unemployment by lowering its interest rates and to increase the supply of money. In order to do this, the Fed will buy securities, lower the reserve ratio or lower the discount rate. Its purpose is to make bank loans less expensive and more available which increases the aggregate demand, output and employment. In contractionary policy, the Fed will try to reduce the aggregate demand by limiting the supply of money as well raising interest rates to fight inflation. The characteristics are opposite of expansionary policy. The Fed will sell securities, increase the reserve ratio and raise the discount rate. This is done to try to achieve the tightening of money in order to reduce spending and control inflation (McConnell & Brue, 2004, pp 11-12).
Federal Reserve
There are 12 regional Federal Reserve Banks in the United States, which were established by Co ...