Below is an essay on "The Federal Reserve Memo" from Anti Essays, your source for research papers, essays, and term paper examples.
The Federal Reserve
The players involved are the Fed, banks, and the people. The people deposit money into the banks and the banks deposit a percentage of that money into the Fed which is called the Reserve Requirement. Then the Fed lends money to the banks then the banks lend to the people.
Factors that Influence the Fed to Adjust the Discount Rate
The rate the Fed charges the banks on the loans are called the discount rate. The discount rate plays a major role in all interest rates, for example mortgages, car loans, student loans, and the rate of credit cards. To show how it works the Fed sets the discount rate at 12 percent this means that all banks are paying 12 percent to borrow from the Fed. Then the banks add a margin or the profit they want to make from the people which borrow. The banks are allowed to charge whatever they want above the discount rate, but it is to their best interest to keep the cost competitive to other banks. It is the responsibility of the person wanting to borrow to call different financial institutions to receive the best rate.
High interest rates will decrease people from borrowing, but when people don’t borrow they don’t spend money in the economy, and when money is not being spent the economy comes to a halt. When people don’t spend money businesses fail and file bankruptcy. More people become unemployed, banks will stop lending and money will stop circulating in the economy which when there is no growth it leads to a recession. So then it is up to the Fed to lower the discount rate to adjust to the economy. For example if the Fed lowers the discount rate to nine percent then the banks will lower their interest rates to the public and stimulate the economy which will also stimulate spending. Now the people will begin to come to the banks to borrow again, but then this causes people who did not plan on borrowing to come into the bank to borrow because the low interest rates. So now people who cannot afford to...