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The Fed refers to the exalted "bank of banks"; the central bank of the United States and the bank of the federal government, otherwise known as the Federal Reserve. The Fed was created in 1913 to organize, standardize, and stabilize the monetary system. Before the Fed was created, almost anyone could issue currency, even a corner drugstore. It wasn't uncommon for banks to collapse, or for the economy to swing wildly between extremes. One of the Fed's missions is to maintain stable prices (or maintain inflation at a rate
that doesn't affect business or household spending), which promote economic growth and maximum employment. The Fed uses a number of methods to achieve this goal. Its most prominent one is the raising or lowering of interest rates. By adjusting interest rates, the Fed indirectly affects demand by either stimulating or slowing the economy. When there is an economic slowdown or recession (remember 2001?), the Fed lowers interest rates to encourage individuals and businesses to borrow money and make large purchases. This increases demand, which stimulates a sluggish economy. When there
is too much money in the economy, people spend more and the demand for products increases more than supply can match. This causes prices to rise and inflation results. During times of inflation (August 2005, for example), the Fed may raise interest rates to discourage borrowing, which slows demand. We hope this answers your question. But we have one more: Just who is Alan Greenspan?
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