Include an explanation of all the tools the Fed uses to contract and expand the economy using money supply and interest rates.
history of banking in United States suggest that during its nascent stage, Banking runs were common as many banks opened and faltered during small period of time. Based on the increase failures of financial institutions, Congress set up National Monetary Commission to look into it. Commission presented its first monetary reform plan to the Congress in year 1912. This plan recommended the establishment of National Reservations Association which would hold the reserves of commercial banks and could make short-term loans to banks to ensure credit availability. United States Congress responded to the situation by enacting Federal Reserves Act thus creating Federal Reserve System. President Woodrow Wilson endorsed these recommendations and Federal Reserves Act became a law on Dec 23, 1913 and FED was created (Federal Reserve Bank of Dallas).
The primary responsibility of FED is to manage the enough money supply and credit to sustain the economic growth of the country by containing inflation. The contraction and expansion of economy is thus achieved with the help of following two economic variables:
1) Money Supply: Expanding or contracting the economy through the money supply is the most frequent method used by FED to exercise its powers to make changes in the economy. Traditionally called Open market operations, these are the activities through which FED either purchase or mope up the excess liquidity from the economic system by issuing securities called T-Bills or Treasury Bills. Similarly when FED wants to expand the economy through money supply, it will purchase the issued T-Bills thus off loading hard currency in the market. This is done primarily for one purpose and that is that through this, FED wants to control the flow of money in the economy. The easy availability to the excess money may create inflation in the economy hence have the potential to impact the real growth in the economy.