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Monetary Policy for the Federal Reserve

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***This is not a request for a written paper, but points to expound on.***
Write a short (2-3 page, typed, double-spaced) essay. Present a thorough analysis of monetary policy. Detail the key factors that influence the quantity of money that people desire to hold, the policy actions taken by the Federal Reserve, and the equation of exchange.

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Solution Summary

This posting gives you a step-by-step explanation of monetary policy, Federal Reserve, and equation of exchange . The response also contains the sources used.

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Step 1
Monetary policy refers to how the Federal Reserve or the monetary authority of country manages liquidity to create economic growth. The central bank of a country actively manages the supply of money in the country through credit, cash, checks, and money market. It influences the credit which includes loans, bonds, and mortgages. The central bank affects the inflation rate and ensures that there is price stability and confidence in the currency(a). The monetary policy also pursues the objectives of promoting economic growth, keeping unemployment at lower rates, and to maintain stable exchange rates with other currencies. The monetary policy refers to the macroeconomic policy pursued by the central bank. This means management of money supply, interest rate, inflation control, increase in consumption, and GDP growth.

Step 2
The key factors that influence the quantity of money that people desire to hold is the transactions motive for holding money. The first factor is the interest rate. The interest rate represents the cost of holding money. It is the income the individual forgoes for holding money balances. The second factor is the volume of income and ...

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