Question

Which of the following best describes the purpose of the Federal Reserve Bank?

A. The Federal Reserve Bank manages the U.S. economy by controlling the money supply.
B. The Federal Reserve insures deposits to make sure customers don't lose money if their bank fails.
C. The Federal Reserve regulates economic activity to prevent the demand for withdrawals from rising above 10 percent.
D. The Federal Reserve assures a free-market system by preventing unnecessary government regulations.

Answer 1

The Federal Reserve Bank manages the U.S. economy by controlling the money supply.

Answer 2

The first alternative is correct (A).

The Federal Reserve is a central bank, whose main function is to control the money supply. This is very relevant for an economy, since the money supply should always be monitored, because too much can cause inflation.

The instrument for the Federal Reserve to manipulate the amount of currency in circulation is monetary policy, which may be raising / lowering the interest rate or selling / buying federal government securities. That is, the Federal Reserve is a body responsible for maintaining the economic environment conducive to the growth of the economy.