Fiscal and Monetary Policy

Monetary Policy

The process by which the government, central bank, or monetary authority of a country control the supply of money, availability of money, and the cost of money (rate of interest), in order to attain a set of objectives toward the growth and stability of the economy.

Monetary Policy is typically considered a …function.

executive

US monetary policy is controlled by:

the Federal Reserve Board

Federal Reserve Board (FED)

An independent agency of the executive branch

Chair is appointed by the President and serves a 14 year term

Federal Reserve Board (FED) determines:

• Reserve Requirement— amount of money banks must keep out of circulation

• Discount Rate— interest rate charged to banks (which, in turn, sets the rate that banks will charge their customers)

Federal Reserve Board (FED) impacts:

• Amount of money available in circulation — increases or decreases in availability will impact inflation and availability of loans

• Economic growth — decreased interest rates encourage consumer and business spending

Why is the Federal Reserve Board Independent

• To create a federal reserve that is free from political pressures.

• To create a federal reserve that is free from corporate influence

Federal reserve free from political pressures

The FED is supposed to make a decision on what is best for the economy and not a political party of ideology.

Federal reserve that is free from corporate influence

The FED cannot be lobbied by corporate PAC’s (this could lead to corruption).

The FED needs to make decisions based on what is best for the economy and not some corporations.