Monetary Policy and the Federal Reserve
The Federal Reserve ("the Fed") is responsible for formulating and implementing the nation's monetary policy. Monetary policy is government actions to increase or decrease the money supply and change banking requirements and interest rates in order to influence spending by altering banker's willingness to make loans. An expansionary monetary policy increases the money supply in an effort to cut the cost of borrowing, which encourages business decision makers to make new investments, in turn stimulating employment and economic growth. A restrictive monetary policy reduces the money supply to curb rising prices, over expansion, and concerns about overly rapid growth (Kurtz).
The Federal Open Market Committee (FOMC) is the Fed's main agency for monetary policy making. All national banks must be members of this system and keep some percentage of their checking and savings funds on deposit at the Fed. In order to regulate the economy the Fed's governing board uses a number of tools. By changing the required percentage of checking and savings accounts that banks must deposit with the Fed, the governors can expand or shrink funds available to lend. The Fed also lends money to member banks, which in turn can make loans to at higher interest rates to business and individual borrowers. By changing the interest rates charged to commercial banks, the Fed affects the interest rates charged to barrowers and consequently their willingness to borrow. These rate changes can sometimes help jump-start an economy that may be sliding into a recession (Kurtz).
Discussion
The current financial situation began with...
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