Control of Money Supply

Table of contents


The control of the amount of money in circulation in any given economy is very crucial. As this research has illustrated, it is the role of every country to regulate the amount of money in circulation so as to support development and continuous economic growth. As a result the country of focus the United States has put into place various measures to control the supply money and more specifically its amount at any given time. This research was undertaken to analyze the control of money supply by the Federal Reserve the main body is which is charged with this task in the United States. In order for the research to achieve this aim, evaluate the importance of controlling the supply of money in the economy has been evaluated. As such the effect of too much or too little money has been discussed. Additionally, the tools or levers which are used to counteract inflation or deflation are looked at extensively.

These tools include: open market operations, reserve requirement changes and discount rate. From the respondents’ answers, open market operations were rated as the most effective tool used by the Federal Reserve. More over it was discovered that the Federal Reserve lacked complete control in the control of money supply due to the fact that the government seemed to interfere with their role for its own political interests. Several recommendations were made including the need for the Fed to improve the existing tools or adopt new ones.

Chapter one

Introductory paragraph

Since 1914, the United States has gone through three major inflations. Each of these price inflations had been heralded and accompany by an increase in the rate of growth of the supply of money (Schwartz, 2008).  Therefore the control of money supply is fundamental to the economy of every country. It is the key component that drives the economy of a nation towards stability and growth. According to Grubel, 2008 most United States economists believe that the severity of the Great Depression was as a result of the unprecedented tightening of the money supply in the United States. Milton Freidman based his argument on the quantity theory of money which asserted that governments should make efforts of keeping the supply of money fairly steady while expanding it slightly to allow for the economy to grow naturally. He believed that if this was done, the market forces would solve the problems of unemployment, inflation and recession.

At present, national governments are able to influence their economy through the use of monetary policy. The use of this monetary authority enables the government to control the supply and availability of money in order to influence the overall level of economic activity which is often in line with its political objectives. The administration of monetary policy is done by an appointed ‘central bank’ like the Bank of England, Federal Reserve Bank in United States and Bank of Canada. In the United States the development of modern central banking dates back to the after effects of the Great Depression in the 1930s. Governments in the developed countries together with the thinking of John Maynard Keynes realized that the collapse of money supply and the availability of credit contributed to the adverse effects of the depression. This realization that the supply of money actually affected economic activity led to the government’s attempts to influence the amount of money that was circulating through monetary policy. As a result, different nations created central banks which would establish a monetary authority. This means that rather than a passive acceptance of whatever happens to the supply of money, the governments would now actively influence the availability of money (Monetary Policy, 2010).

The banks are the main source of most of the money that is held as reserve by the Federal Reserve. As such, all the decisions made by the Federal Reserve have a direct and permanent impact on the banks activities, country’s population and more importantly the economy. The people working in the Central Banks and charged with the task of controlling the amount of money in circulation form the management team and they are therefore responsible for making the major decisions that affect the economy.

This research is concerned with the decisions and the tools that the management and personnel of Central Banks makes and uses respectively to stabilize the economy and their effectiveness. The banking system is very sensitive sector because of the nature and complexity of decisions that have to be made. Ethical issues are nonetheless associated with the decisions made the Central Banks. This is because a certain decision may be readily embraced by one sector in the economy but have adverse effects on another.

Thesis statement

The control of money supply is one of the most fundamental aspects of the economy of the United States since the amount of money in circulation at a given period dictates the state of the economy.

Problem statement

The amount of money in circulation in the economy at any one time is crucial as it can either result in inflation or deflation, deflation which can plunge the economy into recession a situation that would take years for the economy to recover from.  The Federal Reserve has done more work on the money supply process than any other country. At the same time, the role of the dollar as a reserve currency together with the existence of a vast pool of international liquidity dominated in dollars poses special problems for the Fed. As a result the Federal Reserve has made great strides in an endeavor to ensure that its goals are met. One of its key goals is to ensure that the economy is kept stable devoid of factors that would negatively affect it. This is done by employing the three major tools of open market operation, reserve requirement and discount rate. Therefore, the central aim of this research is to analyze why the supply of money in the economy needs to be controlled and the effects that either an increase or decrease in this supply has on the economy.

Purpose of the study

The control of money is a very sensitive and crucial practice for any economy in the world. The manner in which the supply of money is regulated is faced with situations where major decisions have to be made in order to ensure that the economy is balanced i.e. that there is no inflations or deflations. A mistake made by those controlling the money supply automatically influences other areas including the livelihood of the people especially their living standards, banking activities, trade and the overall growth of the economy. A poor decision by the Board of Federal Reserve may lead to injection of excess money into the economy instead of maybe a reduction. The adoption of new policies may lead to decrease or increase in the supply of money.

The purpose of this research is to collect data and make an analysis of the effects that control of money supply has had on the economy of US. This research will broadly assess the decisions, the tools that are used by the Fed and their effectiveness in an effort to control the amount of money circulating in the economy.

Objective of the research

Broad objectives

  • To evaluate and assess how the Federal Reserve controls the supply of money, how effective the tools used are and the impact of the Feds decision on the economy.

Precise objectives

  •  To have a better understanding of what control of money supply is.
  • To assess and establish the importance of controlling the supply of money in the United States.
  • To study the body that is charged with the control of money in the United States.
  • To identify and analyze the specific tools that the Federal Reserve uses to control the supply of money.
  • To assess how effective the tools use are.
  • To identify the monetary aggregates used by the Federal Reserve.
  • To assess the effects of control of money supply on the United States economy.
  • To evaluate the steps taken in the event that balances in the economy is threatened by either inflation or deflation.


This research is designed to evaluate the hypothesis that the control of money supply affects the economic stability of the United States.

Research questions

The main focus of this research paper is to analyze how the Federal Reserve controls the supply of money in the economy and the tools or levers that it uses to accomplish this task. The major aim is to assess how effective these tools are in ensuring the economy remains stable. Due to the extensive nature of this research, the researcher will adopt research questions that will sufficiently act as a guide to the analysis of the control of money supply in the Unites states. The researcher has adopted the following questions for this purpose.

  •  What is control of money supply?
  • Why is it important to control the supply of money in the economy in the United States?
  • Which body is charged with the control of money supply in the United States?
  • What tools does the Fed use to control supply of money?
  • Are the tools used by the Federal Reserve effective?
  • What are the monetary aggregates used by the Fed?
  • How do these monetary aggregates work in the control of money supply?
  • What are the consequences of inflation to the economy?
  • How does the Fed counteract inflation?
  • How is deflation created?
  • How is it possible to ensure that the economy is balanced through the control of money supply?

Significance of the study

In an effort to grasp the dynamics that are put in place to keep the economy stable and balanced, it is necessary to understand and have a broader knowledge of the factors and variables that regulate the in and outflow of money in circulation. An analysis of the different variables that affect the supply of money in the economy will offer further insight into the effectiveness of the tools that are used to bring either an inflated or deflated economy into balance. Once these variables are understood, then a better appreciation of the Federal Reserve will have been developed among those who did not full comprehend the significance of their work in the economy. Additionally, the findings of this research will be essential to the Federal Reserve’s future decisions. This will be in regard to either the adoption of new tools or improvement of the existing ones in controlling money supply.

Abbreviations and definition of terms

  • Fed- Federal Reserve
  • IMF- International Monetary Fund
  • FOMC- Federal Open Market Committee
  • US- United States

For the purpose of this research paper, the following operational definitions are going to be used:

Money aggregate- this refers to the different forms of money which are quantified according to their type. These types are M1, M2 and M3.

Chapter two

Literature Review

It is the view of this research that an understanding of how the supply of money is controlled would start with an understanding of what money is, how it has evolved i.e. its history and what its functions are in the economy.

Definition and History of Money

Money can be defined as any medium which can be used to facilitate the exchange of services and goods between people. Throughout history, exchange has taken different forms. The history of money dates as far back as during the practice of barter trade system. In the barter trade system, commodities were directly exchanged for other tangible goods hence people could trade off the things they had with those that they required. For example, farm animals could be exchanged for other goods like fabrics (Pamphlet, 2010).

Since these commodities had and still have different values, different countries developed standard values for each commodity so that these trade deals could be made easier. Different countries adopted the use of specific individual items as a standard for exchanging goods and services. The value placed on these commodities depended on their divisibility, durability and scarcity. During 400 BC precious metals were introduced as a standard of measurement. For instance, gold, bronze and silver were used among the Chinese and cowries shells, gold nuggets, ivory, whale teeth, cacao beans in other parts of the world. The metals were utilized to mint coins which became the standard form of exchange (Canadian Foundation for economic Education, 1994; Pamphlet, 2010).

However with time the transportation of these precious coins because a challenge as it was dangerous and they were also bulky. Therefore traders began to entrust their coins to goldsmiths in exchange of paper receipts which represented a form of commodity money since they were fully backed by other metals and more so by gold. Eventually, the paper receipts earned credibility as they had become at par with the real coins. This gave rise to yet another form of currency which came to be known as paper money or fiat money which is still in use even today (Hall, 2009). The existence of money has therefore made trade easier. This is because as this paper money circulates from one person to another in the economy, production and trade are facilitated hence allowing people to specialize in areas that they are best fit and this raises the standard of living for everyone (Mankiw, 2007).

Functions of money

A deeper knowledge of the functions of money will broaden the understanding of the intrinsic nature of the functions of the Federal Reserve. The importance of money can not be watered down. By assessing the role of money in the economy, the research will help to establish how changes in its quantity affect various economic variables which include interest rates, inflation, employment and production. There are three functions of money that distinguish it from other assets such as real estate, bonds, stocks or art.

Medium of exchange

Money in the form of checks or currency serves as a medium of exchange. As a medium of exchange it reduces inefficiency and waste by eliminating the amount spent exchanging goods and services. Moreover, money promotes specialization whereby different individuals can specialize in different trades or even professions (Mankiw, 2007).

Unit of account

The measure of money is expressed in money. As a unit of account, it provides a common measure which is used to value the goods and services being exchanged.

Store of value

This means that wealth can be held in terms of money for future use as it liquid in nature i.e. it is always in a form that can be spent unlike bonds or stocks. However, during periods of very rapid inflation, money may not necessarily serve as a useful store of wealth. This is because inflation erodes its purchasing power. For instance if the price levels of commodities doubled in one year the stored money will only purchase half as much in the following year (Hewitt, 2007).

The Measure of money

Money supply is the total stock of assets that are generally acceptable as a medium of exchange within an economy at a particular time. It could also be defined as the amount of money that is available in any given economy. The items that can qualify as media of exchange are varied in number. The degree of liquidity varies as it depends on how easily a given asset can be converted into another asset. Universally, the most liquid assets are notes and coins which were established as medium of exchange by the legal fiat. However, other assets depend on how easily they can be converted to coins and notes. Moreover, as the degree of liquidity falls, the distinction between monetary assets and any other financial assets becomes increasingly blurred.

Variations among countries

The level of sophistication or financial liberation in a country greatly determines the items which would be included when measuring the supply of money. This is because as economies advance, the range of monetary and other financial instruments increases. With time it becomes difficult to establish a distinction between them. As such periodic revisions are necessary for the compilation of monetary statistics. This is because the main purpose of measuring the supply of money is to facilitate an accurate analysis of its growth relative to other macroeconomic targets of inflation and increased economic growth (Pietersz, 2010). As an example, if a certain central bank is operating in a highly developed financial market, and does not monitor some financial instruments especially those that are considered to be relatively illiquid, it might be surprised by changes in consumer demands and a higher than expected or anticipated inflation out-run. Accordingly, different central banks use varying measures to represent money supply. The other treatment that can be applied to certain financial assets such as currency deposits that are foreign, securities and other assets that are less liquid will be addressed later (Measurement of Money Supply, 2010).

The federal reserve of US

Fiat money is money that has no intrinsic value. It is a legal tender hence valid for all debts both public and private as it is established as money by government decree or order. As a result, an economy whose economy relies on fiat money like the US requires an agency that would be responsible for regulating the system (Mankiw, 2007).

In the US the Fed is the most powerful banking and economic system. It is an example of a central bank -an institution that is designed to oversee the activities of the banking system and regulate the quantity of money in the economy. It was established by the Federal government through the US congress in 1931 after a series of failures in the banking sector. It is run by a team of seven members who are referred to as the Board of Governors who are appointed by the government and confirmed by the Senate. Also known as the FED it consists of twelve regional banks which are located in major cities in the country. This means that a particular region can not gain economic advantage over another (Federal Reserve Bank of San Francisco, 2004).

Functions of federal reserve

The Fed has two functions which are related. The first one is to regulate banks and ensure that the health of the banking system is as it should be. More specifically, the Fed monitors the financial condition of each bank and facilitates transactions in the bank by clearing checks. Moreover, it acts as a bank’s bank i.e. it makes loans to banks when these banks want to borrow. When a certain bank that is financially troubled finds itself short of cash, the Fed can lend it hence acting as a lender of last resort i.e. it lends to those banks that can not borrow anywhere else. It does this in a bid to maintain stability in the entire banking system (Mankiw, 2007). The second and most important function is to control the quantity of money that is made available in the economy. This is called the supply of money. All the decisions that are made by policy makers concerning the supply of money constitute what is called monetary policy (Anderson and Kavajecz, 1994).

The federal open market committee (FOMC) monitory policy

The Federal Open Market Committee (FOMC) is the one that makes decisions with regard to the monetary policy of the country. Monetary policy is essentially the strategy that is used to either increase or decrease the supply of money so as to provide and ensure that the growth of the economy is stable without fear of inflation or deflation. The Fed is authorized to carry out its activities by the Monetary Control Act (MCA) of 1980 (Johnson, 2010; Standish, 2000). For the economy to expand, the FED must ensure that enough money is circulating. If too much money is circulating, its value is dragged down which leads to inflation and if it is too little consumers are left with less money to spend leading to recession. Therefore the Fed controls the supply of money which helps to keep the economy relatively balanced. This balance is maintained by buying and selling securities, establishing interest rates and printing more money. The quality theory of money suggests that control of the money supply will help in the fight against inflation (Grubel, 2009).

Standard measurement of money

Since the 1990s the definition employed by the Fed to money supply has been numerously revised. Three primary aggregates are employed by the Fed.  These are; M1, M2 and M3 (Labonte and Makinen, 2006).

M1 is the narrowest measure of money supply and consists of assets such as the physical currency that is held by the public, travellers’ cheques by non-bank financial institutions, demand deposits and other checkable deposits (OCDs). Checkable deposits make up almost two-thirds of M1 money supply. This category is split into demand deposits and checkable deposits. Demand deposits are usually maintained by businesses and normally carry no interest payments. They are called so because the whole amount in a demand deposit is payable to the deposit holder or any other designated person on demand (Uhlig, 2009). Furthermore, a service fee is charged by banks for demand deposit holders though this fee is often waived if the amount tops a certain level. Traveler’s checks on the other hand constitute a small fraction of M1 money supply i.e. less than 1% of the total M1. They can be used to make payments within and outside the country, as long as the issuer guarantees payments to the business or individual that receives them. As a result, they are considered as checks with added features designed to increase their widespread acceptance. In the broader monetary aggregate, a distinction is made between the short and long term securities and the size of the assets (Lepre, 2005).

M2 comprises M1 together with relatively small-denomination time deposits including retail repurchase agreement (RPs), money market mutual funds and savings balances. In the case of RPs, they possess cheque writing features, while mutual funds are similar to short-term time deposits because they can easily be converted to cash. M3 aggregate consists of M2 together with relatively large time deposit, RPs which is both issued by all deposit-taking institution; Eurodollars held by US citizens in commercial banks all over the world and all money funds in institutions (Caplinger, 2006). The least liquid measure, L represents M3 plus treasury securities, corporate bonds, commercial paper, consumer credit and bank loans. This aggregate is basically a measure of the level of outstanding credit market debt of the federal and non-federal sectors. Any central bank in the world attempts to achieve economic stability by varying the amount of money that is in circulation, the composition of the country’s national debt and the cost and the availability of credit. The Fed has three main levers which it applies to affect the supply of money within the economy (Anderson and Kavajecz, 1994).

Control of money supply

The size of the stock of money in a country is chiefly controlled by its central banks. It is essential that every economy and trade controls the supply of money within its country. The supply of money refers to the total assets that are circulating and that are acceptable in the trading of goods (Suranovic, 2009). These assets are primarily made up of cash and bank deposits.

Importance of controlling the supply of money

The role that money plays in making an economy to function properly is invaluable. For instance without it commerce would be impossible. Money as a medium of exchange is used in all economic transactions as such it has a powerful effect on the economic activity of the US (Johnson, 2010). If the supply of money is increased, interest rates would be expected to go down hence spurring investment and stimulating spending among consumers. As a result business firms often respond to the increase in their sales by ordering for more raw materials hence increasing their production. The increased spread and growth of business activities increases the demand for labor (Brague, 2009; Schwartz, 2008). If high amounts of money with too few goods available can cause an upward pressure of prices which inevitably results in inflation. If very intensive, inflation can negatively affect businesses leading to poor living conditions among people. On the other hand, too little money brings about a situation where consumers have less to spend leading to recession (Hall, 2009). Changes in the supply of money can also affect the aggregate demand together with the pace of GDP growth and employment (Labonte and Makinen, 2006). Therefore, it is important that the supply of money is monitored.

Tools used to control the supply of money

The Federal Reserve is able to manage the supply of money by finding a medium between inflation and economic growth. The Fed uses several ways to ensure that this is done (Caplinger, 2006). These include:

Open market operations

This is the most czommonly used lever by the Fed. ‘Open market’ refers to the secondary market for the purchase and sale of US government bills and bonds. In this case, when the government purchases bonds on the open market, the money supply will increase (Brague, 2009; Suranovic, 2009). This money serves as a reserve for the financial system which allows commercial banks and other institutions to lend out more money and even make investments. As a consequence, the supply of and the aggregate demand for money is expanded (Labonte and Makinen, 2006).

This is a legal ratio or rule set by the Fed within limits that have been established by Congress. The rule must be satisfied by all depository institutions which include savings bank, thrift institutions, credit unions and commercial banks. This is done by imposing a statutory cash ratio on all banks i.e. a fraction of the bank’s total transaction deposits are held as a reserve either in the form of currency or coins in the reserve deposit held by the Fed so as to conform to federal banking laws (Brague, 2009). As a result at any given time a bank holds less than 100% of it deposits as reserve. From this reserve requirement, the central bank can influence how much money the banks can lend out. Currently, the US requires banks to make a reserve of 10% for deposits over $45.4 million. If the reserve requirement ratio is increased, it means that the amount of excess reserves in the banking system will reduce since banks would be forced to deposit a larger percentage with the Central Bank (Theory 2- Control of Money Supply, 2010).

Therefore, a decrease in the amount of excess reserve significantly reduces the banks ability to make loans, create additional deposits and to increase the amount of money supply. For small banks with lower total deposit, the reserve requirement is also lower. Reserve requirements basically affect the banking system ability to create additional demand deposits through the money creation process. This would inevitably slow down the rate of growth of money supply.

Discount rate

This is where commercial banks and any other depository institutions are able to borrow reserves from the Central Bank at a discounted rate. There are times when unanticipated withdrawals leave banks with insufficient reserves. In order to make up for these deficiencies in their required reserves, the banks are forced to borrow from Fed at a discounted rate. If the discount rate is set high comparative to the market interest rates, it becomes more costly for the banks to fall below the set reserve requirements. Equivocally, the banks will hold more excess reserves which will reduce the multiple expansions of deposits and the supply of money. At the same time, if the discount rate is low relative to the market interest rates, banks tend to hold fewer excess reserves allowing for greater deposit expansion and an increase in money supply. This therefore enables institutions to vary their credit conditions (Monetary Policy, 2010).

Chapter Three:

Research Design and Methodology: Presentation and Tabulation of Research Data.


This chapter primarily centers on the research design that has been chosen based on the purpose of the research. The design espoused was one that could effectively help in the collection of enough quality data relevant to the research hence enhance the effectiveness of the preferred results.

Research design

This is a research paper for the control of money supply in the United States. The main charged with the responsibility of controlling the money supply in the United States is the Federal Reserve System. This research paper analyses how money supply in the U.S economy is controlled by focusing on the ways (through the use of different levers) in which the Fed actually ensures that the economy is balanced.

Target population

A target population is the group of possible respondents to a survey question. It can also denote an individual, objects, or cases that were used to collect information relevant for the research. This research targeted the united States Federal Reserve which is the body principally charged with the function of controlling the amount of money in circulation in the economy at any given time.

Sample and sampling techniques

A sample is a finite or limited part of a given statistical population whose characteristics are studied in order to gain information about the whole. For purposes of this research where the researcher will be dealing with people, a sample will be defined as a set of respondents who are selected from a large population for the purpose of a survey to gain particular information. This research used a criterion sampling technique in which the researcher developed a close ended questionnaire which was later posted on the email addresses of the targeted sample population. The researcher used this sampling technique because it has strong quality assurance in terms of the data that will be collected. The questionnaire was open to specific randomly selected individuals who had received the posted questionnaires via email. Due to the time constraints, the researcher requested the respondents to fill in the questionnaires within a time period of three days. The respondents who had already responded within the stipulated time would be used as the research sample. In a bid to enhance communication the researcher kept contact with the respondents via telephone to request the respondents to respond to the questionnaires. After the three day period those who had responded were ten in number. Two people each from the five areas where the questionnaires had been sent to.

Research instrument

The researcher due to the time constrain used an online questionnaires as the primary source of data for the research. This instrument was selected because of its cost effective nature when compared to face-to-face interviews and the questions asked were similar for all the respondents which helped to eliminate the possibility interviewer bias. However, the main reason as to why the researcher chose the instrument is because it was found to be less time consuming and also the collection and interpretation of the data is much easier. Since the questionnaire had a close ended format, it was well designed, concise and clear and set in a way that it could collect enough information that was essential for this research.

Questionnaire development

As identified earlier in the research, the control of money supply is a crucial practice for any economy. The achievement of this function by the Fed will require an analysis of such issues as the policies that have been put in place, the tools that are used to ensure that the economy is stable and the steps taken in case there is a problem. Therefore the most effective instrument that will aid the researcher to collect views from all areas in the financial world would be a questionnaire.

Data analysis method

After the researcher had collected all the relevant data from samples through questionnaires, the data was then presented descriptively using percentages. The table format was chosen to present data due to its ease of interpretation and also data correlation.

Chapter four:

Data Analysis, Results and Findings

Introduction – brief history of fed

This chapter focuses on the presentation of the data that was collected and its analysis according to the purpose of the research. The Federal Reserve has a history of almost a century and it is identified as the most powerful system of a country in terms of the economic growth or down turn.

Analysis of results: Evaluation and discussion of findings

 Personal details of respondents

The personal details of the sample population were collected and they included profession, educational background and age. The data collected is tabulated below;

The data from the table shows that 80% the respondents have higher educational qualifications with masters and above and 20% had university degrees. 45% of them had a working experience of 1-5 years and 55% of 6-10 years. This representative sample could therefore provide information that would adequately cater for the objectives of the research.

 Organization data findings and interpretations

From the results tabulated in the table 2 above, the respondents had extensive knowledge of and were positive with regard to the control of money supply in the economy of the United States. As a result, all the respondents i.e. 98.5% of them had a clear and extensive understanding of what control of money supply entailed. They based their argument on the fact that the foundation of their careers was based on a sound knowledge of the happening in the economy.

Additionally, they all agreed i.e. 98.5% that it is very important for the Federal Reserve to control the mount of money in circulation in the economy. There were none who thought otherwise.

Of those who responded 85% agreed that the FOMC’s decision to purchase securities and bonds from banks through open market operations was a welcomed move and the most effective tool for controlling money supply. This is because the funds acquired enabled the banks to give loans to individuals and business hence keeping the economy stable and running. To decrease the supply of money, the sale of securities to the banks leads to money being taken out of the banks and kept in FOMC reserves. This decreases the availability of money in the economy which decreases the investment and spending among the population since the available capital has decreased.

However, 15% of them said that the reserve requirement was the most effective tool. They argued that this tool acted as an insurance policy for the deposits made by the public. As such the probability of the banks running into major deficits that they would not be able to recover were minimized since they have a reserve with the Fed which they would get upon request.

The respondents all concurred that the FOMC reserve fraction of 10% is very practical. They reasoned that if a 100% reserve requirement was instituted on commercial banks, it would be unnecessary for the FOMC to regulate reserve requirement. The Federal Reserves could end up being prohibited from dealing in both primary and secondary issuance of government securities. This would lead to the shutting down of open market operations and the government would be forced to live within its means by either borrowing from the existing pool of savings or out of taxes.

Of the respondents 65.5% disagreed that the FOMC controls the economy of the US. They claim that this control is a layered kind of control as the Fed allows the government to disrupt the economic functioning in order to obtain their own political ends together with the economic aspirations of those that are financially influential. 35.5% on the other hand believe that FOMC actually controls the US economy citing that its creation by the Federal government gave it the power to create money, distribute it and essentially control the economy.

Lowering interest rate was found to be unpopular among all the respondents. They argued that if there is deflation in the economy and the interest rates are already zero, there would be no room for the Fed to lower them further. This means that the policy to fight deflation will not be effective.

Of those interviewed 45.7% said that a small rate of inflation was of some benefit as it would help consumers to ameliorate their debts and the government to meet some of its obligations. Pushing up the inflation rate will make it less likely for the US economy to run into a problem where the interest rate hits the zero mark. The Fed would also be able to stimulate the economy easily if necessary. Nonetheless 54.3% cited such a strategy as risky. They claimed that a temporary surge in inflation might cause a spiral of rising prices which would repel investors and this would make the dollar to decrease in value. At the same time there would be a challenge in ensuring that the inflation does not go higher than planned which would cause a recession and take more years to rise from. Therefore although they agreed that such a move was dangerous they suggested that the possibility of such was inevitable due to the continuous expansion of the country’s debts  as percentage of GDP. 

Learn lowering the discount rate can promote full employment

Research limitations

In the course of the research, various limitations were encountered. One of them was lack of cooperation from the respondents. Throughout the research period, the researcher had to constantly persuade the respondents to fill the questionnaire before the lapse of the stipulated time. The probability that the questionnaires were filled with some form of bias is also quite high. Finally, the findings captured only a limited number of individuals within the economic sector other people outside this sector were not considered though the data collected was adequate enough.


This research has extensively and fully analyzed the importance of controlling the supply of money in the economy of the US. The research was based on the knowledge of the significance of controlling the amount of money in circulation in the economy. The findings in the research have shown that the Fed needs to control the amount of money circulating if it aims at keeping the economy balanced. Various tools have been identified as being vital for this purpose. However, some have been discovered to be more effective than others despite the fact that they are all relevant. In this regard, open market operations which involves either the sale or the purchase of government treasury bills and bonds to the banks and other financial institutions was deduced to be the most effective among all the three tools.


This research would recommend that more extensive research be done in some of the areas that were not exhaustively dealt with in the control of money supply. One of the areas where more study can be devoted to is the analysis the money aggregates. More research could focus on how these aggregates separately influence the money supply and demand in the economy and their overall effects on the growth or decline of the economy. Moreover, the research recommends that the Federal Reserve ought to revise some of its tools from time to time to reflect the changing financial times. Alternatively, the Fed could develop new tools to enhance its control over the money supply in the economy.


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  18. The Measurement of Money Supply. (2010). Retrieved May 31, 2010 from
  19. Theory 2- Control of Money Supply. (2010). Retrieved May 31, 2010 from
  20. Uhlig, H. (2009). Monetary Policy in Europe vs. the US. Retrieved June 5, 2010 from

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