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Unformatted text preview: s within the Federal Reserve Bank in New York, If the decision of the committee is to increase the supply of money, a member of the staff contacts a dealer who is licensed to deal in government securities and the dealer is given a check, drawn on the U.S. Treasury, to buy government securities. The check is then deposited into a member bank, thus increasing the supply of money available to the banking system in general. If the decision is to reduce the money supply, the committee makes recommendations to the board of governors to increase the reserve requirements or take any other action they may deem necessary. MEASUREMENT OF THE MONEY SUPPLY
One of the most important functions of the Federal Reserve is to control the supply of money in the hands of the public, as well as the amount held in bank accounts, both demand–type accounts and thrift deposits. By knowing the amount of money in bank accounts the Fed can manage the money supply by either increasing or decreasing the amount of money in circulation. The various form of money supply (M1, M2 and M3) have been discussed in Chapter 2. The measurements are reported each week by the member banks and the resulting figures are published usually on each Friday. These figures are compared with the previous week and either an increase or decrease is noted. If there is an increase in M1 that exceeds the guidelines set by the Fed, the Fed can take measures to slow or halt the growth in this area. HOW DOES THE FED CONTROL THE SUPPLY OF MONEY?
Many experts disagree on the Fed's attempts to control the supply of available money. Some feel that the economy should be allowed to operate by the law of supply and demand, and others feel that the economy or the supply of money should be strictly regulated. The system that is used tries to seek the best of both worlds. The economy is allowed to grow within certain guidelines through the law of supply and demand, and if the growth rate exceeds those limits the Fed then steps in to slow things down by using
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