Welcome to CyberEssays Website

Monetary And Fiscal Policy - Quick Overview Of The U.S. Economy

        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 there is too
much money in the economy, they will sell the securities back to the
banks. Because it is easier to make gradual changes in the supply of
money, open market operations are use more regularly than monetary
policy.
        When member banks want to raise money, they can borrow from
Federal Reserve Banks. Just like other loans, there is an interest
rate, or a discount rate, the third tool of the monetary policy. If
the discount rate is high, then fewer banks will be inclined to...