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Chapter 25: Problem 1

Why did Congress decide to establish the Federal Reserve System in \(1913 ?\)

Short Answer

Expert verified
Congress established the Federal Reserve System in 1913 to stabilize the U.S. economy following several financial crises and bank failures. The goal was to create a central banking system that could effectively regulate the economy, manage monetary policy, control inflation, manage currency supply, set interest rates, manage the country's reserve accounts, and provide a secure and efficient payment system.

Step by step solution

01

Recognize the Establishment of the Federal Reserve System

Acknowledging that the Federal Reserve System was established by the United States Congress in 1913 is the first step.
02

Understand the Economic Condition Prior to 1913

Understanding that the U.S economy prior to 1913 was plagued by various financial crises and bank failures that disrupted the economy and caused severe economic depressions is important. There was no central banking system, and the economy was unstable.
03

Identify the Need for a Central Bank

Realizing the need for a central bank to manage monetary policy and ensure economic stability was crucial. The idea was to create a system that could respond to financial pressures and regulate the economy effectively.
04

Recognize the Role of the Federal Reserve System

Recognize that the Federal Reserve System was established to provide the country with a safer, more flexible, and more stable monetary and financial system. It serves as the central bank of the United States and has multiple duties, such as controlling inflation, managing currency supply, setting interest rates, managing the country's reserve accounts, and providing a secure and efficient payment system.

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Most popular questions from this chapter

Briefly explain whether you agree with the following statement: "Assets are things of value that people own. Liabilities are debts. Therefore, a bank will always consider a checking account deposit to be an asset and a car loan to be a liability."

What is the quantity theory of money? What explanation does the quantity theory provide for inflation?

What is the difference between commodity money and fiat money?

Based on a Survey of Consumer Payment Choice, researchers from the Federal Reserve Bank of Boston estimated that the average consumer, 18 years of age and older, held about \(\$ 202\) in currency. However, as noted in the chapter, there is actually about \(\$ 4,500\) of currency in circulation for every person in the United States. a. How can the amount of U.S. currency in circulation be so much higher than the amount held by the U.S. population? b. What does the difference in part (a) imply about the measures of the money supply of the United States?

An article in the Wall Street Journal on the shadow banking system contained the following observation: "If investors rush to the exits en masse, acting as a herd, asset prices could plummet and markets could face funding problems." Why might people who have invested in a money market mutual fund, for example, be more likely to "rush to the exits" if they heard bad news about the fund's investments than would bank depositors if they received bad news about their bank's investments?
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