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What does the Federal Reserve do on a regular basis to protect consumers and how do...

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linnie4352 | Student, Undergraduate | Salutatorian

Posted April 16, 2011 at 7:59 AM via web

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What does the Federal Reserve do on a regular basis to protect consumers and how do they relate to consumer protection?

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justaguide | College Teacher | (Level 2) Distinguished Educator

Posted April 16, 2011 at 7:27 PM (Answer #1)

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Though the Federal Reserve does not have a role to play in ensuring the quality of products that are sold, there is one aspect it can influence to protect consumers and that is in controlling inflation. Inflation leads to an increase in the price of all products and makes it difficult for consumers to buy what they want to.

The reasons behind inflation are basically divided into two categories, one is referred to as cost-push. This is due to an increase in the price of raw materials of production and cannot be controlled by the Fed.

The other category referred to as demand-pull is inflation due to a rapid increase in the consumption of goods. The easy availability of credit is responsible for this to a large extent.

The Fed can control demand-pull inflation by raising interest rates. With higher interest rates consumers are vary of borrowing funds to buy products; with a drop in demand the prices also decrease.

Increasing interest rates also helps in another way. It gives people who would have spent the money with them immediately to buy products an incentive to delay this and instead invest their money to earn a reasonable rate of interest.

In this way the Fed too can protect consumers though in an indirect way.

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