How the Quantity of Money is Controlled
How the Quantity of Money is Controlled
The quantity of money available is called the money supply. In an economy that uses commodity money, the money supply is the quantity of that commodity. In an economy that uses fiat money, such as most economies today, the government controls the supply of money: legal restrictions give the government a monopoly on the printing of money. Just as the level of taxation and the level of government purchases are policy instruments of the government, so is the supply of money. The control over the money supply is called monetary policy.
In the United States and many other countries, monetary policy is delegated to a partially independent institution called the central bank. The central bank of the United States is the Federal Reserve—often called the Fed. If you look at a U.S. dollar bill, you will see that it is called a Federal Reserve Note. Decisions over monetary policy are made by the Federal Open Market Committee. This committee is made up of members of the Federal Reserve Board, who are appointed by the president and confirmed by Congress, together with the presidents of the regional Federal Reserve Banks. The Federal Open Market Committee meets about every six weeks to discuss and set monetary policy.
The primary way in which the Fed controls the supply of money is through open-market operations—the purchase and sale of government bonds. When the Fed wants to increase the money supply, it uses some of the dollars it has to buy government bonds from the public. Because these dollars leave the Fed and enter into the hands of the public, the purchase increases the quantity of money in circulation. Conversely, when the Fed wants to decrease the money supply, it sells some government bonds from its own portfolio. This open-market sale of bonds takes some dollars out of the hands of the public and, thus, decreases the quantity of money in circulation.
The most obvious asset to include in the quantity of money is
The quantity of money available is called the money supply. In an economy that uses commodity money, the money supply is the quantity of that commodity. In an economy that uses fiat money, such as most economies today, the government controls the supply of money: legal restrictions give the government a monopoly on the printing of money. Just as the level of taxation and the level of government purchases are policy instruments of the government, so is the supply of money. The control over the money supply is called monetary policy.
In the United States and many other countries, monetary policy is delegated to a partially independent institution called the central bank. The central bank of the United States is the Federal Reserve—often called the Fed. If you look at a U.S. dollar bill, you will see that it is called a Federal Reserve Note. Decisions over monetary policy are made by the Federal Open Market Committee. This committee is made up of members of the Federal Reserve Board, who are appointed by the president and confirmed by Congress, together with the presidents of the regional Federal Reserve Banks. The Federal Open Market Committee meets about every six weeks to discuss and set monetary policy.
The primary way in which the Fed controls the supply of money is through open-market operations—the purchase and sale of government bonds. When the Fed wants to increase the money supply, it uses some of the dollars it has to buy government bonds from the public. Because these dollars leave the Fed and enter into the hands of the public, the purchase increases the quantity of money in circulation. Conversely, when the Fed wants to decrease the money supply, it sells some government bonds from its own portfolio. This open-market sale of bonds takes some dollars out of the hands of the public and, thus, decreases the quantity of money in circulation.
The most obvious asset to include in the quantity of money is