Monetary And Fiscal Policy

Monetary and Fiscal Policy

The Monetary and Fiscal Policies, although controlled by two
different organizations, are the ways that our economy is kept under
control. Both policies have their strengths and weaknesses, some
situations favoring use of both policies, but most of the time, only
one is necessary.
The monetary policy is the act of regulating the money supply
by the Federal Reserve Board of Governors, currently headed by Alan
Greenspan. One of the main responsibilities of the Federal Reserve
System is to regulate the money supply so as to keep production,
prices, and employment stable. The “Fed” has three tools to manipulate
the money supply. They are the reserve requirement, open market
operations, and the discount rate.
The most powerful tool available is the reserve requirement.
The reserve requirement is the percentage of money that the bank is
not allowed to loan out. If it is lowered, banks are required to keep
less money, and so more money is put out into circulation
(theoretically). If it is raised, then banks may have to collect on
some loans to meet the new reserve requirement.
The tool known as open market operations influences money and
credit operations by buying and selling of government securities on
the open market. This is used to control overall money supply. If the
Fed believes there is not enough money in circulation, then they will
buy the securities from member banks. If the Fed believes ther...

Monetary And Fiscal Policy

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