Reserve requirements are the third tool that the Fed has at its exposure. The term reserve requirements refers to the percentage of deposits that a bank or other depository institution may not lend out or invest and must hold either as vault cash or on deposit at a Federal Reserve Bank. Basically, it is money that the banks have taken in, but cannot lend. All depository institutions, not just banks, are subject to the same reserve requirement rules: 3% of the bank’s first $44.3 million of checkable deposits, and 10% of more than $44.3 million must be kept as reserves. However, this rate of 10% can vary from 8 to 14% (Mishkin 449). This can be a very frustrating idea for banks, whose goal is to get that excess money out there in the market and earn them some more money. Reserve requirements are kept-track-of by using a two-week average. For example, if a bank is required to hold 3% reserves on $10 million, it can meet the requirement as is best for that specific bank. If it holds all of the required $300,000 in the first week, it can hold $0 the second week. Likewise, it can split it up into $150,000 for each week. Bottom line, there are many possibilities available. Banks receive credit in one two-week period for small amounts of excess reserves they held in the previous period. A small deficiency in one period may be made up with excess reserves in the following period. There are financial penalties for banks that fail to meet their reserve requirements (Hempel 246-247).

It is clear just how vital monetary policy is to the economy. It, along with fiscal policy, influences the economy and steer it in the right direction. As described before, a very important advantage to monetary policy over fiscal policy is the relative freedom from political influence. This means that monetary policy will do what is best for the economy, not for any political reason. Implementing and enforcing monetary policy is no easy matter, which is why such an important and complex organization such as the Fed takes on that responsibility. In order to flourish, the U.S. economy definitely needs guidance from an outside force, and that outside force is the Federal Reserve System and its monetary policy.

Some topics in this essay:
Board Governors, Bank Basically, Fiscal Policy, Fed Monetary, Politics Unlike, monetary policy, Federal Reserve, Bank Fed, Reserve System, fiscal policy, market operations, Committee FOMC, , output employment, real rates, federal reserve, reserve requirements, nominal rates, monetary base, short run, monetary policy economy, amount money circulation, federal reserve system, lower real rates, reserves market operations,