Monetary Policy
According to Federal Reserve Board site (2005) ”…the term "monetary policy" refers to the actions undertaken by a central bank, such as the Federal Reserve, to influence the availability and cost of money and credit to help promote national economic goals. The Federal Reserve Act of 1913 gave the Federal Reserve responsibility for setting monetary policy”(Federal Reserve Board 2005).
Under the control of the Federal Reserve are three tools of monetary policy - open market operations, the discount rate, and reserve requirements. Use of these three tools, the Federal Reserve influences the demand for, and supply of, balances that depository institutions hold at Federal Reserve Banks and in this way alters the federal funds rate (interest rate at which depository institutions lend balances). Changes in the federal funds rate trigger a chain of events that affect other short-term interest rates, foreign exchange rates, long-term interest rates, the amount of money and credit, and,......
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