edf40wrjww2CF_PaperMaster:Desc
Macroeconomics Impact on Business
Monetary policy has become the dominant component of the United Stated stabilization policy because it is faster and more flexible than fiscal policy. In addition monetary policy is isolated from political pressure. The Federal Reserve has three primary monetary tools by which it can influence the money creating abilities of the commercial banking system; open market operations, reserve ratio and discount rate (Federal Reserve Bank of New York, 2007).
An open market operation consists of the buying and selling of government bonds to both commercial banks and the public. This process of buying and selling securities is the Federal Reserve’s most effective way of influencing the money supply. Whether the Federal Reserve decides to buy government bonds from commercial banks or the public the reserves of commercial banks will increase (McConnell & Brue, 2004).
When the Federal Reserve buys bonds from commercial banks the bank gives up part of their bonds to the Federal Reserve banks and in paying for those bonds the reserves of the commercial bank will increase. The most important thing about this transaction is by increasing the reserves in the banking system the lending ability of commercial banks will also increase (McConnell & Brue, 2004). Although the effect of purchasing bonds from the public is similar to that of purchasing bonds from commercial banks the process is different. The transaction begins will the individual or company giving their bonds to the Federal Reserve Banks where they will receive a check drawn directly from t ...