BY: Dominique Coleman & Imani Ashmeade

MONETARY POLICY

• The actions of a central bank, currency board or other regulatory committee that determine the

size and rate of growth of the money supply, which in turn affects interest rates.

WHAT IS MONETARY POLICY ?

N.d. Photograph. Econmatters.com. Web. 12 May 2013. 

• Monetary policy is maintained through actions such as increasing the interest rate, or

changing the amount of money banks need to keep in the vault (bank reserves).

WHAT IS MONETARY POLICY ?

N.d. Photograph. American.com. Arthur C. Brooks. Web. 12 May 2013. 

In the United States, the Federal Reserve

(The Fed) is in charge of monetary policy.

Monetary policy is one of the ways that the

U.S. government attempts to control the economy and control inflation.

HOW DOES MONETARY POLICY OPERATE IN

AMERICA ?

N.d. Photograph. Nytimes.com. Arthur Sulzberger Jr. Web. 12 May 2013. 

• If the money supply grows too fast, the rate of inflation will increase; if the growth of the

money supply is slowed too much, then economic growth may also slow.

• In general, the U.S. sets inflation targets that are meant to maintain a steady inflation of 2%

to 3%.

HOW DOES MONETARY POLICY EFFECT INFLATION?

N.d. Photograph. Billshrink.com. Web. 12 May 2013. <http://www.billshrink.com/blog/7050/>.

• In order to control inflation and the amount of money in circulation, The Federal Reserve uses three main tools;

The Reserve Requirement – This is the amount banks must keep on reserve at the end of the day.

The Discount Rate – This is the interest rate The Federal Reserve charges to allow banks to borrow funds from their discount window.

The Feds Funds Rate – The Fed funds rate is the rate that banks charge each other for overnight loans to meet these reserve balances. These loans are known as the Fed funds. This tool is used a lot more often because it is the easiest to modify.

HOW DOES MONETARY POLICY OPERATE IN

AMERICA ?

• Monetary policy directly effects the country's unemployment rate through interest rates.

• Lower interest rates allow families to borrow more cheaply to buy what they need, like cars,

homes and consumer electronics. This stimulates enough demand to put the economy

back on track. • Low interest rates also allow businesses to borrow for less, giving them the capital to hire

new workers to meet rising demand.

HOW DOES MONETARY POLICY EFFECT

UNEMPLOYMENT?

The interest rate is the percent charged, or paid, for the use of money. It is charged when the money is being borrowed, and paid when it is being loaned.

• “Since 2007, the Fed has had its hands full preventing, not inflation, but a global depression. During the banking

crisis, the Fed created many innovative programs that quickly pumped trillions of dollar of liquidity into the

economy to keep banks solvent. Many were worried that this would create inflation once the global economy

recovered. However, the Fed developed an exit plan to wind down the innovative programs. For example, it created a Certificate of Deposit program to mop up

excess credit in banks.”

-“What is Being Done to Control Inflation?" About.com US Economy

CURRENT MONETARY POLICY IN THE UNITED

STATES

• In it the Fed actually encourages inflation at a specific rate that they decide on.

• Currently that rate is 2%, excluding gas and food.

• Small amounts of inflation encourages economic growth. This is because when people expect prices to rise, they tend to buy more now to avoid future price increases. This generates the demand needed for a healthy economy.

CURRENT MONETARY POLICY IN THE UNITED

STATES

The Fed has recently come up with another tool to manage inflation;

Why is this tool effective?

• "Monetary Policy." Definition. N.p., n.d. Web. 09 May 2013.

• "Unemployment Solutions." About.com US Economy. N.p., n.d. Web. 09 May 2013.

• "What Is Being Done to Control Inflation?" About.com US Economy. N.p., n.d. Web. 30 Apr. 2013.

• "Current FAQsInforming the Public about the Federal Reserve." FRB: How Does Monetary Policy Influence

Inflation and Employment? N.p., n.d. Web. 30 Apr. 2013.

BIBLIOGRAPHY

How can a certain amount of inflation be a good thing ?

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