Monetary Policy

Paper Summary:

This paper discusses the components and the functions of the Federal Reserve system. The tools available to handle either recession or inflation are presented. The paper explores why the discount rate is not regarded as an effective tool of the Federal Reserve.

From the Paper:

"The economics textbook definition of the "money multiplier" assumes lending banks automatically expand their credit money supply to a multiple of their aggregate, or saved reserves of money. The Federal Reserve requires all banks, after the crash of 1920, to keep a certain amount of money in reserve in relation to the money lent by the bank. In the U.S. the required reserve ratio usually hovers around ten percent, implying that the money supply should be about ten times larger than the aggregate reserves of banks. The significance of the multiplier is that the more banks are required to keep in reserve; theoretically the less they will be able to lend. Thus, in its basic form, that multiple is equal to the reciprocal of the required reserve ratio."

More papers on Monetary Policy:

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• Essay # 69611 : "Monetary Policy in the USA 2004"

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