Unformatted text preview: n our personal financial affairs and on the nation's economic performance. Yet many people are unsure how monetary policy affects our nation's economy and even less certain how it is carried out. This booklet has been prepared to throw light on these subjects We begin by explaining what economists mean when they talk about “money”, and how banks and other depository institutions can “create” money. We then explain how monetary policy is made in the United States and describe the policy instruments the Federal Reserve System has at its disposal to control the size of the money supply–the total amount of money circulating in the national economy. This leads us to a discussion of how Federal Reserve actions in making the money supply grow faster or slower affect important economic magnitudes like interest rates, unemployment, and inflation. Finally, we describe the operating procedure used by the Federal Reserve to carry out monetary policy. THE PROCESS OF MONEY CREATION DEFINING MONEY
Money is customarily defined by what it does. Since money's traditional and most important role is as a medium of exchange, that is, as a means of making payments, it
Dynasty School (www.dynastySchool.com) 2-15 REAL ESTATE FINANCE
is usually defined to include all of the things that people generally accept in payment. In the U.S., roughly nine–tenths of all payments are made by check and check–like instruments, with currency transactions making up the balance. Hence the measure of the nation's money supply which most economists prefer is the total of the public's holdings of currency and of deposits on which checks can be written. This measure of the money supply is referred to by the Federal Reserve as M1.
Until recently, commercial banks were unique in being able to offer deposits on which checks could be written. As late as 1980, these traditional checking accounts, called demand deposits, accounted for more than 90% of all checkable deposits. Since the late 1970's, however, regulatory and Institutional changes have both exp...
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This note was uploaded on 12/30/2010 for the course SOC 101 taught by Professor Zhung during the Spring '10 term at Punjab Engineering College.
- Spring '10