Monetary And Fiscal Policy

This essay has a total of 932 words and 3 pages.

Monetary And Fiscal Policy


Monetary and Fiscal Policy The Monetary and Fiscal Policies, although controlled by two
different organizations, are the ways that our economy is kept under control. Both
policies have their strengths and weaknesses, some situations favoring use of both
policies, but most of the time, only one is necessary. The monetary policy is the act of
regulating the money supply by the Federal Reserve Board of Governors, currently headed by
Alan Greenspan. One of the main responsibilities of the Federal Reserve System is to
regulate the money supply so as to keep production, prices, and employment stable. The
"Fed" has three tools to manipulate the money supply. They are the reserve requirement,
open market operations, and the discount rate. The most powerful tool available is the
reserve requirement. The reserve requirement is the percentage of money that the bank is
not allowed to loan out. If it is lowered, banks are required to keep less money, and so
more money is put out into circulation (theoretically). If it is raised, then banks may
have to collect on some loans to meet the new reserve requirement. The tool known as open
market operations influences money and credit operations by buying and selling of
government securities on the open market. This is used to control overall money supply. If
the Fed believes there is not enough money in circulation, then they will buy the
securities from member banks. If the Fed believes there is too much money in the economy,
they will sell the securities back to the banks. Because it is easier to make gradual
changes in the supply of money, open market operations are use more regularly than
monetary policy. When member banks want to raise money, they can borrow from Federal
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