A few questions about economics for an amateur?

Question

What is the role of the FED?

What is the reserve currency, why is the $ the reserve currency?

What are central banks?

What does it mean when the central banks pump money into the financial markets for liquidity or something like that?

thanks

Answer 1

The main role of the FED is to make sure that we never have another depression, or super inflation, what they would like to see would be moderate growth. The FED tries to control this in a number of ways, FED FUNDS RATE (the rate banks are charged for loans from the fed), Money supply ( how much cash is in circulation), and numerous other ways.

A reserve currency is a foreign currency that a country will hold in a central bank, it helps control inflation, and stabilizes the domestic currency. Many countries use the $ as their reserve currency because it doesn't have wild swings in value (or at least until recently).

Central banks are not like normal banks that you could just drive to and make a deposit, they handle international transactions, currency exchange. They are ran by the government, but are independent if that makes any since.

Central banks I.E. the FED pumps money into the economy primarily thru bonds picture the federal reserve like a huge room, in that room are two things, bonds and cash. I n times of recession or slowdown the fed buys bonds from the public or the treasury with the cash in the room, releasing it to circulation, and in times of excess growth it does the opposite in this way the FED can control how much cash is in circulation, inflation, exchange rates, interest rates....

I hope this helped