Monetary Policy in the United States - Essay Example

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Monetary Policy in the United States

2. As a central agency the FED can seriously affect the manner in which it can affect the banking system. Firstly, it monitors the sale of different government instruments. In this manner it affects the rate of interest in the market and ensures the growth in credit and money supply.
Secondly, it also fixes the manner in which these instruments are purchased from the public and corporations, thereby affecting the interest rate again. Thirdly, the FED can monitor the effectively monitor the amount of lending, thereby influencing the price of the securities and bank stock.
3. Very simply put the reserve requirements are the amount of vault cash and deposits that the banks are stipulated to hold with themselves. Less money in the reserves would imply more money available - the bank will have more loan able funds at its disposal, thereby having favorable implications on the cost of transactions and the bargaining capacity of these institutions with other bodies. The changes in the reserve requirements are made rather infrequently by the government, it may even be the fact that this measure has been employed only once or twice in a decade (Jhonson 2005).
The discount rate is the price the central bank, other financial banks pays while engaging themselves in money relat ...Show more

Summary

a. Controlling interest rates: This hints towards the role that the FED plays as a monitoring agency. Lower interest rates will serve as an incentive to businesses to invest into capacity expansion, thereby impacting the GDP in the long run.
b. Controlling inflation: Inflation is one of the major issues which confront the FED…
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