The Federal Reserve

In: Business and Management

Submitted By taismith94
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The Federal Reserve
The Federal Reserve controls the reserves by buying and selling securities. If the Federal Reserve buys securities it has to pay the primary dealer’s bank whatever amount they agreed upon, which increases the reserve limit. However when the Federal Reserve sells securities the primary dealer’s bank pays the amount agreed upon, which in turn decreases the reserve. This process is known as open marketing. “Open marketing referees to the fact that the Federal Reserve doesn’t decide on its own which securities dealers to do business with on a particular day.”(Federal Reserve Education, 2013)
Security dealers, primary dealers, makes bids or offers on each security and the Federal Reserve then choices the one with the best offer for its purpose. Security dealers, primary dealers, are skimpily the banks and financial institutions of the United States of America.
The reserve is the amount of money that each bank or financial institution is to keep in its vault at all times. However the amount of the reserve can change daily depending on the selling and buying of the Federal Reserve.
The reserve also determines how much money the bank or financial institution can loan to the economy thru a process called the multiplier effect. “The multiplier effect is the expansion of a country's money supply that results from banks being able to lend.”(Investopedia US, 2013) An example of the multiplier effect would be if my bank had a reserve requirement of 10% of every dollar and I made my weekly deposit of $500 the bank would be required to keep $50 in the vault but could loan the rest out to other customer or even myself. If this process continued with this money until the last deposit only equaled the 10% that the bank must keep it would have created $5,000 for the economy.
Now imagine that the Federal Reserve decides to buy some securities over the next…...

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