Monetary Policy

Federal Reserve Board decisions on the money supply. To make the economy grow faster, the Fed can supply more credit to the banking system through its open market operations, or it can lower the member bank reserve requirement or lower the discount rate-which is what banks pay to borrow additional reserves from the Fed. If, on the other hand, the economy is growing too fast and inflation is an increasing problem, the Fed might withdraw money from the banking system, raise the reserve requirement, or raise the discount rate, thereby putting a brake on economic growth. Other instruments of monetary policy range from selective credit controls to simple but often highly effective moral suasion. Monetary policy differs from fiscal policy, which is carried out through government spending and taxation. Both seek to control the level of economic activity as measured by such factors as industrial production, employment, and prices.