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The usual goals of monetary policy are to achieve or maintain full employment, to achieve or maintain a high rate of economic growth, and to stabilize prices and wages.
Until the early 20* century, monetary policy was thought by most experts to be of little use in influencing the economy. Inflationary trends after World War II. however, caused governments to adopt measures that reduced inflation by restricting growth in the money supply.
Monetary policy is the domain of a nation's central bank. The Federal Reserve System (commonly called the Fed) in the United States and the Bank of England of Great Britain are two of the largest such “banks" in the world. Although there are some differences between them, the fundamentals of their operations are almost identical and are useful for highlighting the various measures that can constitute monetary policy.
The Fed uses three main instruments in regulating the money supply: open market operations, the discount rate, and reserve requirements. The first is by far the most important. By buying or selling government securities (usually bonds), the Fed - or a central bank — affects the money supply and interest rates. If. for example, the Fed buys government securities, it pays with a check drawn on itself. This action creates money in the form of additional deposits from the sale of the securities by commercial banks. By adding to the cash reserves of the commercial banks, then, the Fed enables those banks to increase their lending capacity. Consequently, the additional demand for government bonds bids up their price and thus reduces their yield (i.e.. interest rates). The purpose of this operation is to ease the availability of credit and to reduce interest rates, which thereby encourages businesses to invest more and consumers to spend more. The selling of government securities by the Fed achieves the opposite effect of contracting the money supply and increasing interest rates.
Directions for questions 191 to 195
Read the below passage and answer the following questionsThe usual goals of monetary policy are to achieve or maintain full employment, to achieve or maintain a high rate of economic growth, and to stabilize prices and wages.
Until the early 20* century, monetary policy was thought by most experts to be of little use in influencing the economy. Inflationary trends after World War II. however, caused governments to adopt measures that reduced inflation by restricting growth in the money supply.
Monetary policy is the domain of a nation's central bank. The Federal Reserve System (commonly called the Fed) in the United States and the Bank of England of Great Britain are two of the largest such “banks" in the world. Although there are some differences between them, the fundamentals of their operations are almost identical and are useful for highlighting the various measures that can constitute monetary policy.
The Fed uses three main instruments in regulating the money supply: open market operations, the discount rate, and reserve requirements. The first is by far the most important. By buying or selling government securities (usually bonds), the Fed - or a central bank — affects the money supply and interest rates. If. for example, the Fed buys government securities, it pays with a check drawn on itself. This action creates money in the form of additional deposits from the sale of the securities by commercial banks. By adding to the cash reserves of the commercial banks, then, the Fed enables those banks to increase their lending capacity. Consequently, the additional demand for government bonds bids up their price and thus reduces their yield (i.e.. interest rates). The purpose of this operation is to ease the availability of credit and to reduce interest rates, which thereby encourages businesses to invest more and consumers to spend more. The selling of government securities by the Fed achieves the opposite effect of contracting the money supply and increasing interest rates.
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