Monetary Policy

Monetary Policy

In the United States there are two different ways in which money can be controlled. The first way is through the Monetary Policy. Monetary policy is used to fight inflation or in other, words stimulate the economy by controlling the amount of money available to business and consumers. The second way money is controlled in the United States is through the fiscal policy. This policy differs from the monetary policy in a sense that is refers to efforts by the government to stimulate the economy directly through spending. The purpose of this paper will focus on how the federal reserve uses tools to control money, how those influences will effect the money supply and macroeconomic factors, how money is created and what combinations of monetary policy will help achieve a balance between economy growth, low inflation and a reasonable rate of unemployment.

One of the main responsibilities for the Federal Government is to regulate the money supply so as to keep production, prices, and employment stable. The “Fed” has three tools to manipulate the money supply. They are the reserve requirement, open market operations, and the discount rate. The first tool, the reserve requirement is the percentage of the deposits (at its vaults or with the Fed). The Fed mandates this ratio. If this ratio is decreased, banks are required to hold lesser amount as reserves and can lend that much more to their customers, thus increasing the money supply in the economy.