How does the federal reserve bank control inflation?

Answer 1

by the raising and lowering the interest rates. I think if you will take the time to read the web pages I have listed you will learn a great deal about the Fed. and who they are.

Anyone else who reads this please take the time to read as well it is information that everyone needs to learn and know of.

Econgal: If you can prove me wrong do so; but you cannot. You may think the sites I have given are garbage but I challenge you to prove me and the sites given wrong. By the way I can furnish much more information if required.

Answer 2

The fed can counteract inflation by employing contractionary monetary policy also referred to as "tight money". They have certain tools they can use to accomplish this. You may have notes about the required reserve ratio, the discount rate and open market operations? The goal here is to slow down the faucets of cash and credit and pump the brakes on spending. This can be done by raising interest rates (discount rate, fed funds rate) and tightening the money supply (sell existing U.S. government securities on the open market). Although the required reserve ratio could be raised in an attempt to reduce loan activity, this tool is used very infrequently. By raising the reserve ratio, "banks" must keep more and more funds on reserve and therefore have less left over (excess) to lend out as loans. Loan activity slows down as then does overall economic activity. Hope this helps? It is a bit more complex than this, but I tried to break it down.

Don't let the previous responder fill your head with garbage. Where would we be without centralized banking? We would not be the great nation we are today. Sure there are problems, but get real. I respect your opinion, but beg to differ.

Answer 3

To put it very simple, there are three basic ways to control inflation via monetary policy:

1.Offering government financial assets at a very high interest, so that banks will prefer to allocate their funds in this assets and therefore will have less money available to lend, then final customers will have less access to credits and shops will sell less goods, prompting firms to lower their prices if they want to still sell anything.

2.Claiming higher interests in any money lent to banks, the effect is similar to the first policy, because banks will have less money available to lend to their customers.

3.Raising the reserve ratio, which consists in a percentage of savings which the Fed requires that banks cannot allocate in any loan or investment. The money multiplier approach shows that every time the reserve ratio rises, less money and credit can be created. And this will imply less purchases, less sales, and the general lowering of prices.

Answer 4

By panicking when they observe an unexpected change in inflation and usually by using monetary policy to combat it. This includes the use of interest rates to affect consumer and investor demand. Many econometric models will be used- all of which are probably far too complicated to try and tell you about!