Monetary Policy

By Bobby

What is Monetary Policy

Definition of 'Monetary Policy'

The actions of a central bank, currency board or other regulatory committee that determine the size and rate of growth of the money supply, which in turn affects interest rates. Monetary policy is maintained through actions such as increasing the interest rate, or changing the amount of money banks need to keep in the vault (bank reserves).

As said in Investopedia In the United States, the Federal Reserve is in charge of monetary policy. Monetary policy is one of the ways that the U.S. government attempts to control the economy. If the money supply grows too fast, the rate of inflation will increase; if the growth of the money supply is slowed too much, then economic growth may also slow. In general, the U.S. sets inflation targets that are meant to maintain a steady inflation of 2% to 3%.

Tools of Monetary Policy

The tools are open market operations, discount rate, and reserve requirements.

Open market Operations

Fed doesn’t decide on its own which securities dealers it will do business with instead business with the primary dealers compete on the basis of price.

Discount rate

Its the interest rate changed by the federal system to depositary institutions on short term loans.

Reserve requirements

Reserve requirements are the portions of deposits that banks must maintain either in their vaults or on deposit at a Federal Reserve Bank.

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The goals of Monetary Policy

TO promote maximum employment, stable prices and moderate long-term interest rates.

What is Inflation

Inflation is the general increase in price of the goods.

What is the role of the Federal Open Market Committee (FOMC)?

It formulates the nations Monetary Policy. The voting members of FOMC consists of 7 members of the board of governors. The FOMC meets 8 times a year in Washington and at each meeting the committee discusses the outlook for the U.S. economy and monetary policy options.

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