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RUNNING HEAD: Monetary Policy




Monetary Policy





Monetary Policy
Monetary policy is the “deliberate changes in the money supply to influence interest rates and thus the total level of spending in the economy.” (McConnell & Brue, p. 286). The Federal Reserve System implements monetary policy and is composed of the Board of Governors of the Federal Reserve System, the Federal Open Market Committee, 12 regional Federal Reserve Banks, many private U.S. member banks and various advisory councils. The goal of monetary policy is to achieve and maintain price-level stability, full employment, and economic growth. The Federal Reserve Banks have two main assets, securities and loans to commercial banks. The securities are bought and sold to commercial banks and the public in order to control the money supply. These transactions influence the amount of commercial bank reserves and therefore the ability of the commercial banks to create money through the lending process. Bank reserves are deposits in accounts with the central bank plus currency that is physically held in bank vaults. Commercial banks must hold minimum reserves in the central bank. The minimum reserve requirement is set by the central bank and is currently 10% in the United States. These reserves are designed to satisfy withdrawal demands. The buying and selling of securities or open market operations, the reserve ratio and the discount rate are the tools of monetary control that are used by the federal reserve to influence the amount of reserves and the money supply.
Monetary Policy Tools
Open-market operations is the most important tool of monetary control. It consists of buying and selling government bonds from and to commercial banks and the general public. The U.S. Federal Reserve said on Friday (November 30, 2007) it added $6.5 billion of temporary reserves to the banking system through...