Earlier we learned the important of Fiscal Policy and Fiscal Spending to combat inflation. In this unit, we learn that the Federal Reserve is another important player in the government operation to balance out monetary expansion. Through the use of reserve requirement, discount rate, and open market operations, the Fed have the opportunity to dictate the monetary policy. Through these decisions, policy either leaders towards a tight money supply (a decreased money supply) or a loose money supply (an increased money supply). During the four business cycles, the Fed dictates the levels of each in order to pull out of a depression or balance a peak. .
The reserve requirement is the percent of deposits a bank must keep on hand. If the Federal Reserve increases the reserve requirements, the money supply decreases. This is often the policy of a peak in order to combat heavy inflation as more people can afford to borrow and there is more investments. Decreasing the reserve requirement is done to increase the money supply of a recession or depression. .
Interest the Federal Reserve charge member banks for overnight borrowing is known as the discount rate. By increasing the discount rate, money supply decreases because there is less borrowing of money from the reserve by banks in order to carry out loans; increasing the discount rate is often associated with a peak or recovery time period. When discount rate decreases, the money supply thus increases to stimulate bank borrowing in often somber-economic times. .
Open Market Observation is the most direct method the Federal Reserve has to effect monetary policy. The Open Market Observation is the branch that buys and sells securities. Buying securities is associated with a bigger money supply where as selling securities is considering lowering the money supply. This is the most immediate method of the three, with the quickest results. .
The Monetary Policy of the Federal Reserve combined with the governments Fiscal Policy is often what is credited with keeping American from another recession.
