The reserve requirement can then be used to help control economic expansion and inflation.
The financial markets have been evolving. The desire to avoid reserve requirements has led to the creation of new types of financial accounts which do not have reserve requirements. Two of these are Certificates of Deposit (CDs) and Sweeps accounts. Sweeps accounts have only existed since 1994. These accounts automatically transfer money out of accounts with reserve requirements, like checking accounts, to accounts without required reserves such as money market accounts (Sellon and Weiner, 1996, p. 10). This lowers the amount of money in banks which is subject to reserve requirements and lessens the impact the Federal Reserve Board can have on monetary policy when it changes reserve requirements.
The Federal Reserve Board has recently changed the way it models the economy to include expectations. The new model places more importance on what people think is happening in the economy instead of just what the economic indicators are showing to predict future trends (Brayton, et. al., 1997). Expectations are important to predicting and controlling inflationary pressures on the economy. The inclusion of expectations in modeling of the economy by the Federal Reserve Board will lower the impact of the reserve requirement on controlling money growth, and inflation. It also lowers its influence on monetary policy. These changes have meant that the Federal Reserve Board now relies much more on open market operations to control the economy (Greenspan, 1997, p. 254).
Analysis of Fedpoint 45: Reserve Requirements
The article Fedpoint 45 is written is simple language and is intended for the layman, or entry level student, wishing an overview of reserve requirements and an understanding of their purpose in the Federal Reserve System. It accomplishes this task adequately. The article is accurate in its presentation but is incomplete ...
Fedpoint 45: Reserve Requirements. (2000, January 01). In LotsofEssays.com. Retrieved 09:32, October 31, 2014, from http://www.collegetermpapers.com/viewpaper/1304059601.html