The Equation of Change Essay Example | Topics and Well Written Essays - 1250 words

The Equation of Change - demonstrate ExampleThis can also be considered as the number of times that the currency is spent on finished products and services per year. PQ is the nominal GDP of the country (the level of price (P) times the physical totality of products and services (Q). Economists believe that changes in the supply of bills especially improper monetary polity be the most significant factors that cause macroeconomic stability. Importance of the stability or lack thereof, of the velocity of money directly relates to the look of the money supply (Thomas, 2005). If the velocity was always constant, then the money supply would be the single determinant of the level of national GDP spending. No polity instrument other than the interchange relys control would be needed to accurately control GDP spending. If the velocity fluctuates in a completely un inevitable manner, then Fed keep-engineering changes in M would have no predictable consequence on GDP spending. The co ntrol of the money supply would be a totally inefficacious method of influencing GDP. To the degree that velocity is random the influence of FED reserve money supply control on GDP spending and general economic activity is compromised. If the velocity is random but is unconditional of the money supply and is relatively stable and subject to acceptable good prediction, then FED policy of controlling the money supply is greatly effective way of influencing GDP spending. Question two The social system of the national Reserve System Federal Reserve Banks There are twelve Federal Reserve Banks from the Federal Reserve Districts. Each bank is a legally separate corporation owned by the commercial banks in its districts. The directors of individual banks recommend the allocation of discount rate which is then endorsed by the get along of Directors. These directors also select one banker from each district to serve the Federal Advisory Council. Other functions allow clearing checks, h elp regulating banks, withdrawing damaged currency from circulation and replacing it with new ones as well as acting between local business communities. Member Banks These are commercial banks that hold stock in the Federal Reserve Banks commercial banks chartered by the Federal Government and state banks chartered by state governments. Their major function is to hold reserves as deposits or vault cash at the Federal Reserve Banks. Board of Governors consist of seven members appointed by the president and led by the chairman. All governors must come from different states and are voting members of the FOMC. They set reserve requirements, set bank regulations and select recommendations to set the discount rate. The board has authority over certain regulations unrelated to fiscal policy but have significant impacts on the monetary system. Federal Open Market Committee The citizens committee consists of the members of the Board of Governors, president of the New York Fed, and president s from four other Reserve Banks. The major function of FOMC is to make decisions concerning the learn of open market operations and hence controls the monetary base. The committee has the key responsibility of formulating monetary policy. Federal Advisory Council comprises of the twelve interpretive programs of the banking system. The council advices and consults with the Board of Governors on all issues within the board control. The Reserve Banks selects one representative from the district who normally serves for a term of three