Gurjit Chahal
Econ 1A
Demiray
25 January 2015
Monetary Policy
The monetary Policy refers to actions taken by a central back, such as the Federal Reserve, to
influence the national economy. The Federal Reserve Act of 1913 gave the Federal Reserve
responsibility for applying the monetary policy. The Federal Reserve has three tools at their disposable
to enact the monetary policy; open-market operations, the discount rate, and reserve requirements. The
first tool, open-market operations is the purchase and sale of securities in the open market. In the past,
the Federal Reserve has used this to adjust the supply of reserve to keep the federal funds rate, the
interest rates where institutions lend reserve balances to other institutions overnight. The discount rate
is a interest rate charged to commercial banks and other institutions. The Federal Reserve Banks offer
three discount window programs; primary credit, secondary credit, and seasonal credit. Each of these
programs has their own interest rates and the windows are fully secured. Reserve requirements are the
amount of funds that a institution must hold in reserves. These institutions must hold reserves in the
form of vault cash or deposits with Federal Reserves Banks. The dollar amount for reserve
requirements is determined by the Federal Reserve’s Board of Directors.
The Fed has been stimulating the US economy since it was established. In 2012 they imposed
“quantitive easing”, which is a monetary tool. This is actually the third time they imposed quantitive