Monetary Policy Essay

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Monetary Policy Paper

Introduction

Fiscal and monetary policies focus on quickly returning the economy to sustainable, healthy growth. Any type of fiscal relief package will boost consumer and business spending and can augment the nation's long-term growth potential. Expansionary monetary policy can stimulate growth and provide insurance against the possibility of deflation. This paper will present information on four topics: (1) tools used by the Federal Reserve to control the money supply, (2) how these tools influence the money supply and in turn affect macroeconomic factors? (3) how money is created? (4) recommended monetary policy combinations that best achieve a balance between economic growth, low inflation, and a reasonable
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Tools used by the Federal Reserve to control money supply?
On The Federal Reserve Web site"The major tool the Fed uses to affect the supply of reserves in the banking system is open market operations—that is, the Fed buys and sells government securities on the open market. These operations are conducted by the Federal Reserve Bank of New York. When the Fed wants the funds rate to rise, it does the reverse, that is, it sells government securities. The Fed receives payment in reserves from banks, which lowers the supply of reserves in the banking system, and the funds rate rises" (http://www.frbsf.org/publications/economics/letter/2004/el2004-01.html#subhead2).
Another tool the Fed uses to affect the supply of reserves The Fed can't control inflation or influence output and employment directly; instead, it affects them indirectly, mainly by raising or lowering a short-term interest rate called the "federal funds" rate. Most often, it does this through open market operations in the market for bank reserves, known as the federal funds market (http://www.frbsf.org/publications/economics/letter/2004/el2004-01.html#subhead2).
The Fed can also use discount interest rate decreases as way of controlling money: The Fed can lower the discount rate and lower the costs for banks holding low excess reserves which will lower the excess reserve rate. If the Fed lowers the

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