Discuss the use of monetary policy to influence the levels of Essay

Discuss the use of monetary policy to influence the levels of inflation and unemployment in an economy - Essay Example Reserves of commercial bank are one from of liabilities of federal bank .the imposition of reserve requirement from federal bank results this liability. Treasury deposits are also a liability for federal bank since there are the deposits made by treasury department of states. Federal Reserve notes are the notes circulated by federal bank in the country in the form of paper money. They are the claims against the assets of federal bank and hence become liability for federal bank. Since, we know that one of the core functions of federal bank is the creation and control of money in the economy, the monetary policy acts as an action plan for this purpose. The federal bank has three core tools to control the money supply in the market Since bonds are floated in the market by government and other organization to raise money, they can be used by the federal bank to increase or decrease the money supply. The federal bank can either buy or sell bonds with commercial bank or general public. Buying securities from commercial banks the reserve of commercial bank are increased while the assets base of federal bank increases. Same thing happens when the federal bank buys securities from public, the asset base of the federal bank increases as well as that of commercial bank. Overall the money at the disposal of federal bank increase which increases the money supply n the market. Reserve ratio is the amount of reserve of commercial bank that they are required to keep with the federal bank. This reserve is not allowed to be loaned to the public. A federal bank, when want to increase money supply in the market decreases the reserve ratio which in turn decreases the reserve of commercial bank kept with federal bank. With the increase money at the disposal of commercial bank they are able to load out more money in the market which increases the money supply. Similarly if the federal bank wants to decrease the money supply it increases the