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Monetary Policy

Monetary Policy
Introduction
“The goals of monetary policy include the promotion of sustainable economic growth, full employment, and stable prices. Through monetary policy, the Fed is most able to maintain stable prices, thereby promoting economic growth and maximum employment,” (Fed101, n.d.). An understanding of macroeconomic policy changes and the impacts will help producers of products anticipate the consequences of alternative policies and take appropriate actions. These actions shall be in business decisions and as participants in the public policy making process. The goal is for the Federal Reserve to know when to use the tools to control the money supply.
Tools Used by the Federal Reserve
The Federal Reserve has three tools used in monetary policy and those tools are open-market operations, the reserve ratio, and the discount rate. The Monetary Policy simulation addresses the spread between the Discount Rate (DR) and the Federal Funds Rate (FFR), Required Reserve Ratio, and Open Market Operations. The Monetary Policy simulation shows how the changes in the Discount Rate, Federal Funds Rate, Required Reserve Ratio, and Open Market Operations affect the Real GDP (Gross Domestic Product), inflation, and unemployment.
“The Fed’s open-market operations consist of the buying of government bonds from, or the selling of government bonds to, commercial banks and the general public,” (McConnell & Brue, 2004, p. 270). The open-market operations tool is most important to the fed’s for influencing the money supply. The open-market operation tool is the most frequently used due to the flexibility of the open-market operations. “The term ‘open market’ means that the Fed doesn’t decide on its own which securities dealers it will do business with on a particular day. Rather, the choice emerges from an ‘open market’ in which the various securities dealers that the Fed does business with-the primary dealers-compete on the basis of price,” (Fed101, n.d.). During the...