The Concepts of Monetary Policy

Topic: Finance
Words: 343 Pages: 1

Monetary policy is how the Federal Reserve controls the quantity of money and loans in the American economy. Interest rates are influenced by the cash and credit flow of the US economy. The purchasing power of money decreases as prices rise due to inflation. Inflation develops when the amount of credit and money available grows too quickly (Fattan, 2020). Consequently, monetary policies are proposed and implemented to promote productivity, non – inflationary, and long-term interest rates. The Federal Reserve can keep costs steady and promote long-term economic growth and jobs by enacting an efficient monetary policy.

The Federal Reserve has essential monetary policy tools: open market operations, the leverage ratio, and cash reserve. An open market is one in which the Federal Reserve does not decide on specific assets it will trade (Arnold, 2019). The marketplace, as mentioned above, necessitates the buying and selling of government bonds. Because they are flexible, open market operations are utilized as a monetary policy instrument (Mirdala & Canale, 2019). The discount rate is the amount of money charged to institutions for short-term borrowing by Federal Reserve Banks. Finally, the reserve requirements are the amounts of resources that financial institutions are obligated to have to store in safes or deposit at Federal Reserve Banks.

Monetary policy in the United States consists of the Federal Reserve’s actions and communications to maintain jobs, low inflation, and a neutral long-term rate of interest, which are the existing market that the government has allowed the Fed to achieve. By affecting the federal funds rate, the Federal Reserve imposes monetary policy. Financial institutions apply interest rates to loans (Fattan, 2020). The Federal Reserve raises federal funds through monetary policy to reduce the cost of inflation. The New York Federal Reserve has been chosen annually by the Federal Open Market Committee (FOMC) to execute transactions for the System Open Market Account since the mid-1930s (Fattan, 2020). The SOMA is the most significant asset on the Federal Reserve’s balance sheet. Open market operations are the most commonly employed monetary policy tool because of their adaptability.


Arnold, R. A. (2019). Economics (13th ed.). Cengage Learning, Inc.

Fattan, M. A. (2020). Monetary stability (Concepts and implications). International Journal of Psychosocial Rehabilitation, 24(5), 40–51.

Mirdala, R., & Canale, R., R. (2019). Fiscal and monetary policy in the Eurozone: Theoretical concepts and empirical evidence. Emerald Publishing.

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