Monetary policy determines the size and growth rate of the U.S. money supply by influencing interest rates. The Federal Reserve, as the central bank of the U.S., is in charge of monetary policy. The Federal Reserve uses three main tools - reserve requirements, the discount rate, and open market operations - to adjust the money supply by buying and selling government treasuries.
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Monetary Policy: What it is and Who is in Charge
1. Monetary Policy:
What it is and Who is in Charge
By Mazen El-Haidari
Communication for Finance Professionals
MBA 6366
2. What is Monetary Policy?
Determines the size and rate growth of the U.S. money supply which in turn affects the interestrates.
Two Types:
• Expansionary – to increase money supply
• Lower unemployment
• Boost borrowing and spending
• Stimulateeconomic growth
• Contractionary – to decrease money supply
• Controls inflation
• Can slow economic growth
• Depress borrowing and spending
3. Who is the Federal Reserve?
• They are the central bank of the U.S. and are in charge of the U.S. monetary policy.
• Comprised of 12 regional Fed. Res. Banks made up from the CentralGovernment Agency (CGA)
• CGA is considered independent as its decisionsdo not rely on the president or any other govt. official.
• 4 Main Responsibilities:
• Conduct monetary policy by influencingthe credit conditions in the U.S. Economy
• Supervise banking institutionsensuring safety of financialsystem and protectingconsumer’s credit rights
• Maintain financialstability
• Provide financialservices
4. Understanding Demand
Demand
• People demand money
• Transaction Demand – buying goods through daily needs
Ex. Groceries, going to the movies, restaurants, etc.
• Asset Demand – preferring liquidassets over illiquidassets
Ex. Checking Account is more liquidthan real estate
5. Understanding Supply
Supply
• The Federal Reserve SuppliesMoney and controls it
• If the Fed. ↑ money supply, it will ↓ interestrates
• If the Fed. ↓ money supply, it will ↑ interestrates.
6. How does the Federal Reserve adjust the Money Supply?
3 Federal Reserve Tools that affect Money Supply
• Reserve Requirement – How much money banks have to hold in
reserves mandated by the Fed.
• Discount Rate – Interestrate the Fed. charges banks to borrow money
(affects the Fed. Fund Rate)
• Open Market Operations – buying and selling of govt. treasuries(most
importantbecause Fed. does this the most)
3 FED Tools
Increase Money Supply Decrease Money Supply
Reserve Requirement ↓ ↑
Discount Rate ↓ ↑
Open Market Operations Buy (Big) Sell (Small)