The Monetary and Fiscal Policies, although controlled by two different organizations, are the ways that our economy is kept under control. Both policies have their strengths and weaknesses, some situations favoring use of both policies, but most of the time, only one is necessary.The monetary policy is the act of regulating the money supplyby the Federal Reserve Board of Governors, currently headed by AlanGreenspan. One of the main responsibilities of the Federal ReserveSystem is to regulate the money supply so as to keep production,prices, and employment stable. The “Fed” has three tools to manipulatethe money supply. They are the reserve requirement, open marketoperations, and the discount rate.The most powerful tool available is the reserve requirement.The reserve requirement is the percentage of money that the bank isnot allowed to loan out. If it is lowered, banks are required to keepless money, and so more money is put out into circulation(theoretically). If it is raised, then banks may have to collect onsome loans to meet the new reserve requirement.The tool known as open market operations influences money andcredit operations by buying and selling of government securities onthe open market. This is used to control overall money supply. If theFed believes there is not enough money in circulation, then they willbuy the securities from member banks. If the Fed believes there is toomuch money in the economy, they will sell the securities back to thebanks. Because it is easier to make gradual changes in the supply ofmoney, open market operations are use more regularly than monetarypolicy.When member banks want to raise money, they can borrow fromFederal Reserve Banks. Just like other loans, there is an interestrate, or a discount rate, the third tool of the monetary policy. Ifthe discount rate is high, then fewer banks will be inclined toborrow, and if it is low, more banks will (theoretically) borrow fromthe reserve ba...
