Essay about Macroeconomic Impact on Business Operations

666 Words 3 Pages
The Federal Reserve is considered an independent central bank who is still held accountable to Congress. Monetary Policy is a tool that the government uses in order to influence the economy. The FOMC (Federal Open Market Committee) can affect monetary policy by using three tools.
1. Open Market Operation- the buying and selling of U.S. government securities
2. Altering reserve requirements- the amount of money banks must hold when its customers deposit monies.
3. Adjusting the discount rate- the interest rate charged to commercial banks.
As of today the FOMC is changing interest rates to assist in inflation, intrest rates must change in order to make inflation better. A decision the FOMC makes for the good of our economy. Open Market
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The percentage of what the bank must hold per deposit may be changed at anytime by Central Bank. This can affect the economy by changing the money supply and credit conditions.
Adjusting Discount Rate- The final tool of Monetary Policy which is defined as a central bank is a lender of the last resort. The Federal Bank will make short term loans to commercial banks in its district. Discount rate adjusting is a commercial bank borrowing from the Federal Reserve Bank and giving them an IOU drawn against the paper and secured by acceptable collateral such as U.S. government securities. Today’s banking system does not always deal with cash, especially to create new money. Money can be created by commercial banks when they loan money, when a person needs a loan to improve an already opened business the bank will consider the ability of the establishment to repay the loan. If the loan is approved the bank then creates a checkable deposit which in turn creates more money, which is usually an electronic increase no money actually exchanges hands. Much of the money in our economy comes from credit of commercial banks. When the established business has repaid the loan to the bank then that money is destroyed, and the established company has essentially bought back its IOU. Government Securities are another way of making money, when banks purchase government bonds they are creating new
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