"Monetary Policy is the most significant function of the Fed; it is probably the most-used policy in macroeconomics" (Colander, 2004, p. 661). This paper will discuss and elaborate on "The Monetary Policy Report" submitted to the Congress on February 11, 2003 and concepts of Macroeconomics by David Colander. The state of the economy, concerns of the Federal Reserve, and the stated direction of recent monetary policy will also be discussed.
"Monetary policy is a policy of influencing the economy through changes in the banking system's reserves that influence the money supply and credit availability in the economy" (Colander, 2004, p. 659). Monetary policy also refers to the actions undertaken by a central bank, such as the Federal Reserve, to influence the availability and cost of money and credit to help promote national economic goals. The Federal Reserve Act of 1913 gave the Federal Reserve responsibility for setting monetary policy. The Federal Reserve controls the three tools of monetary policy- open market operations, the discount rate, and reserve requirements.
"An open market operation is the Fed's buying and selling of government securities (the only type of asset the Fed is allowed by law to hold in any appreciable quantity). These open market operations are the primary tool of monetary policy" (Colander, 2004, p.667). The discount rate is the interest rate charged to commercial banks and other depository institutions on loans they receive from their regional Federal Reserve Bank's lending facility. The Federal Reserve Banks offer three discount window programs to depository institutions: primary credit, secondary credit, and seasonal credit, each with its own interest rate. Reserve requirements are the amount of funds that a depository institution must hold in reserve against specified deposit liabilities.
The Board of Governors of the Federal Reserve System is responsible for the discount rate and reserve... [continues]
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