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According to the Federal reserve website the definition of monetary policy refers to the "actions of the Federal reserve to influence the availability and cost of money and credit to help to help promote national economic goals," (www.federalreserve.gov). The tools used to balance the money supply are discount rates, required reserve ratio and open market operations. In 1913 the Federal Reserve took responsibility for setting the monetary policy (www.federalreserve.gov). When originally developed its purpose was to maintain the gold standard, today the responsibility is much more complex. Using the tools named above the Federal Reserve controls the demand, supply and balances banks must hold in their depositories, this in turn results in the federal funds rate. The federal funds rate is the interest rate at which depository institutions lend balances at the Federal Reserve to other depositories institutions over night. The changes in the federal funds reserve cause a long chain of events such as short term and long term interest rates, the amount of money and credit available as well as changes in employment rates, inflation rates and gross domestic product fluctuations. To better understand the effects of the discount rate, federal funds rate, required reserve ratio and open market operations have on controlling the money supply I completed a simulation called Monetary Policy on the University of Phoenix website. Observations from the simulation will be used throughout this paper.
The Federal Reserve maintains control over the amount of excess reserves it requires lenders to have to promote continued flow of money. The three tools mentioned above that the Federal reserve uses to control the required am ...