Monetary Policy

The number 1 job of the Federal Reserve is to target the growth of the money supply but manipulating interest rates through Open Market Operations. The FED would prefer to stop inflation in contractionary monetary policy (or Tight Money Policy) by raising interest rates through the sale of bonds. Also at the disposal of monetary policy is the ability to buy bonds back from the public thereby creating an increase in the money supply causing inflationary pressure through an expansionary Monetary Policy. The manipulation of the Fed Funds Rate through the FOMC buying and selling bonds is modeled on the Money Market Graph. The FED does not set the rate but influences it by setting targets through OMO.

Other tools of Monetary Policy is the Reserve Ratio and the Discount Rate (referred to in your text as the "Window of Last Resort") but are rarely used. The discount rate is in current practice no longer a "Window of Last Resort" due to the FED attempting to create monetary stability due to the Economic Crisis in Financial Markets in 2008. However, College Board would still prefer that you note that the discount rate and reserve ratio are not significant tools of the FED.

The FED has expanded the tools of Monetary Policy in the last two years but these are not relevant for our coursework as of this moment in time.