Monetary policy Monetary: relating to money or currency Monetary policy is the way the government controls the supply of money as a way to influence price stability and bring trust in the value of the currency. 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.

What is the federal reserve? The Federal Reserve, or “The Fed”, is an independent agency of federal government that regulates the nation’s money supply. The Fed runs 12 regional banks around the nation, that regulate the money supply.

Three main objectives of the fed Maintain full employment Keep prices steady Keep the economy growing

How does the federal reserve control the supply of money? Reserve Requirement: the amount of money banks are required to keep on hand for consumers. Discount Rate: the interest rate the Fed charges if your bank needs to borrow from the Fed because it doesn’t have the amount of reserves it is required to have.

The reserve requirement To Slow the Economy: Fed can increase the amount that must be kept in reserve which means that there will be less money for lending or investing. To Grow the Economy: The Fed may lower the reserve requirement to allow banking institutions to loan and invest more of the deposits. This could bring interest rates down, encourage more borrowing, and this causes people to spend more.

The Discount Rate To Grow The Economy: Raising the discount rate costs banks more to borrow from the Fed. Consumer interest rates will change when the discount rate changes. If the discount rate increases, banks will raise the interest rates they charge their customers. To Slow The Economy: Lowering the discount rates allows lenders to lower the interest rates they charge their customers. This encourages people to borrow money to buy goods.