What is monetary policy? It is the regulation of the money supply and interest rates by a central bank in order to control inflation and stabilize currency. It directly influences the borrowing and spending of bank-dependent loan customers. The objective for monetary policy is to try and establish economic growth with stable prices.

For the United States, the Federal Reserve ("the Fed" for short) is the central bank (frbsf.org). Central banks have become dominant institutions (Timberlake, 1). The Federal Reserve was created in 1913 when Congress passed the Federal Reserve Act, which formally granted establishment of Federal Reserve banks, to furnish an elastic curren

traditionally, changes in the rate may have announcement effects, which are that they sometimes signal to markets a significant change in monetary policy. A higher discount rate can be used to indicate a more restrictive policy, while a lower rate may signal a more expansionary policy. Therefore, discount rate changes are often coordinated with FOMC decisions to change the funds rate.

The Structure of the Federal Reserve System

The Federal Reserve System distributed twelve banks throughout the nation in the cities of: (1) Boston, (2) New York, (3) Philadelphia, (4) Cleveland, (5) Richmond, (6) Atlanta, (7) Chicago, (8) St. Louis, (9) Minneapolis, (10) Kansas City, (11) Dallas, and (12) San Francisco. However, the Board of Governors sets most of the monetary policy and it's held in Washington, D.C. This board is made up of seven members, who are chosen by the President and verified by the Senate for a four-year term. However, the chairman has the ability to be reappointed to another term. The chairman is the most powerful member of the board because this person serves as a leader and representative for the board, and normally exercises more power in determining the course of monetary policy than the other governors do.

Purchases and sales of foreign currency by the Fed are directed by the FOMC, acting in cooperation with the Treasury, which has overall responsibility for these operations. The Fed does not have targets, or desired levels, for the exchange rate. Instead, the Fed gets involved to counter uncontrollable movements in foreign exchange markets, such as speculative movements that may disrupt the efficient functioning of these markets or of financial markets in general. The Foreign exchange market intervention is the buying and selling of foreign exchange by a central bank in any nation in order to move exchange rates up or down. The graph on page 6 shows the U.S. dollar and Japanese yen market exchange. At point A, the exchange rate is 100 yen per one U.S. dollar. Lets say that over a period of time, Americans buy more from Japan than Japanese buys from the U.S. Equilibrium shifts to point B as the supply of dollars increase in relation to the demand for dollars. Now the exchange rate is 90 yet per one U.S. dollar. The dollar has depreciated against the yen. Now to appreciate the U.S. dollar, the Fed must intervene in the foreign exchange market to increase the dollar value. The Fed does this by buying dollars in exchange for yen, shifting the demand curve to point C, where equilibrium is back to 100 yen per U.S. dollar.

Foreign Exchange Market Intervention

This graph shows Equilibrium in the money market and what happens to interest rates and the quantity of money.

Some common words found in the essay are:
Supply Functions, Individual Government, Economic Theories, Federal Reserve, Bank York, Monetary Policy, Board Governors, Washington DC, Japan Japanese, Instead Fed, monetary policy, federal reserve, money supply, demand money, foreign exchange, board governors, funds rate, federal funds, discount rate, bank reserves, federal reserve system, federal funds rate, foreign exchange market, impact monetary policy, price level stability,
Approximate Word count = 2573
Approximate Pages = 10 (250 words per page double spaced)