Monetary Policy
In order to promote national economic goals, a central bank acts to influence the availability and cost of money and credit, this is known as monetary policy. The Fed has three main tools with which to carry out policy. These instruments of monetary policy are open market operations, discount policy and reserve requirements. Open market operations are the Fed's most important tool. It causes a change in the monetary base. When banks need to borrow money; they borrow it from the Fed. Discount policy denotes a change in the discount rate. The tool that is used the least is reserve requirement changes. It is not used often due to its power to tie up or to free resources. The Fed uses these tools to reach economic targets and to stabilize the economy. The United States economy has been growing over the past five years. The Fed has implemented policy in order to combat byproducts of this growth such as inflation and other effects. The present state of the economy has changed from the standard growth of the past and is now moving in a new direction. From 1995 until 1999 the United States economy was performing incredibly well. In 1995, real gross domestic product inc
Growth has been falling in the first half of 2001 and the unemployment rate is expected to slowly rise to 41/2 percent by the fourth quarter. There has been a large drop in mortgages since May of 2000, which will free up spending money for the private sector. Recently, investment-grade corporate bonds have fallen to their lowest levels in 11/2 years. Through sound monetary policy, the Fed has been able to restrain unemployment and inflation rates. Most policy has been defensive and few dynamic changes have been made. History shows the U.S. economy slowing during the first two years that a republican is in office. Politics aside, do not look for substantial change to occur anytime soon. With the new tax cut, it will take time for the private sector to get that extra spending money in their pockets. When they do, look for spending to increase along with the interest rate to combat inflation. Once consumers begin to spend more, the business sector will again flourish and employment is expected to rise again. With the rise of interest rates also look for investment activity to rise. It may take a while, but the United States will again experience economic growth. The cost of finance and the prospective rates of return to capital will be two decidin
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Approximate Word count = 853
Approximate Pages = 3 (250 words per page double spaced)
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