Financial Markets and Institutions (2-downloads)

1. Go to 

www.federalreserve.gov/general.htm

and

click on the link to general information. Choose

“Structure of the Federal Reserve.” According to the

Federal Reserve, what is the most important respon-

sibility of the Board of Governors?

2. At the same site, click on “Monetary Policy” to find

the beige book. According to the summary of the most

recently published book, is the economy weakening

or strengthening?

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214

Conduct of Monetary

Policy: Tools, Goals,

Strategy, and Tactics

Preview

Understanding the conduct of monetary policy is important because it affects

not only the money supply and interest rates but also the level of economic

activity and hence our well-being. To explore this subject, we look first at the

Federal Reserve’s balance sheet and how the tools of monetary policy affect

the money supply and interest rates. Then we examine in more detail how the

Fed uses these tools and what goals the Fed and other countries’ central banks

establish for monetary policy. After examining strategies for conducting mone-

tary policy, we can evaluate central banks’ conduct of monetary policy in the

past, with the hope that it will give us some clues to where monetary policy

may head in the future.

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C H A P T E R

The Federal Reserve’s Balance Sheet

The conduct of monetary policy by the Federal Reserve involves actions that affect

its balance sheet (holdings of assets and liabilities). Here we discuss the following

simplified balance sheet:

1