Expansionary Monetary Policy

As the central bank to the United States, the Federal Reserve operates and maintains the financial system for the nation.   One of their key duties includes “influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates (Federal Reserve Board, 2005).  
The influence of the Federal Reserve and its control of the nation's interest rates and supply of money determine the flexibility of the credit market.   While people consistently look to invest in personal choice purchases, the ease in which people are able to use their credit purchasing power is dependent on the accessibility of credit.   The continued facilitation of such transaction demands   contribute to overall economic health.  
The goal for a successful economy is based on the ability to “achieve and maintain price-level stability full employment, and economic growth”(McConnell, Brue & Flynn, 2009).   One of the ways the Federal Reserves seeks to maintain this balance in times of economic downturns or crisis is through the use of the expansionary monetary policy.   The four tools used for monetary control are as follows:

1. Open market operations
2. Reserve Ratio
3. Discount Rate
4. Term Auction Facility

The decision of the Federal Reserve to use such tools is an attempt to increase money supply and allows for people to continue their financial activities keeping the market flexible.   The Federal Reserve Bank's open market operations consists of the buying and selling of   government bonds to commercial banks and the public (McConnell, Brue & Flynn, 2009).   The increase in the money supply when money is gained upon sales contribute to overall availability of monetary funds.
The manipulation of the reserve ratio has a direct effect on commercial banks and their ability to lend (McConnell, Brue & Flynn, 2009).   The amount of mandatory reserve needed for banks to lend money is based on the current ratio of money that...