Essay: Tools used for the regulation of the Monetary Policy

Sample Essay

There are a number of tools that are used to monitor and adjust the Monetary Policy of a country in order to ensure that a balance can be attained between consumer demand and the financial standing of the country (Federal Reserve Bank of New York, 2009). Further on, light shall be shed upon the four basic tools that are used by the Federal Reserve System to exercise the nation’s monetary policy.

In order to assure a successful monetary policy, the Federal Reserve System uses tools such as Interest Rates, Monetary Base, Discount Window and Reserve Requirements.

Monetary Base: The monetary base of an economy is controlled through open market operations. Government Securities are bought and sold by the Central bank to bring about the expansion or contraction of the monetary base of the economy as per requirement.

Reserve Requirements: Every Central Bank exercises certain statuary policies upon all commercial banks that they are bound to abide by. These policies incorporate statuary requirements that the banks are oblige to fulfill as well as Advance Deposit Ratios. The Central Bank uses these advance deposit ratios to regulate the amount of money that is lent to the consumer. An increase in advance deposit ratios is brought about to bring an increase in lending and a decrease is exercised to discourage lending of money.

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