Fin 503 Case

TUI

FIN 503

Module 1 Case

Introduction to Money

Alex Smith

THE US DOLLAR

The main advantages the US has by having its own currency over European Union countries that use the Euro are: US monetary policy; US Dollar status as a reserve currency and the ability the US Treasury has to print money to meet its obligations.

Monetary policy can be defined as, ‘The actions of a central bank, currency board or other regulatory committee that determine the size and rate of growth of the money supply, which in turn affects interest rates. Monetary policy is maintained through actions such as increasing the interest rate, or changing the amount of money banks need to keep in the vault (bank reserves)’. In the United States monetary policy is controlled by the Federal Reserve and whose aim is to influence the amount of money and credit in the U.S. economy. The goals of the Federal Reserve are to: promote maximum employment, stable prices and moderate long-term interest rates. Implementation of effective monetary policy means that the Fed can maintain stable prices and therefore support conditions for long-term economic growth and maximum employment. The Federal Reserve’s three instruments of monetary policy are open market operations, the discount rate and reserve requirements. Open market operations involve the buying and selling of government securities. The term “open market” means that the Fed doesn’t decide on its own which securities dealers it will do business with on a particular day. Rather, the choice emerges from an “open market” in which the various securities dealers that the Fed does business with – the primary dealers – compete on the basis of price. Open market operations are flexible, and thus, the most frequently used tool of monetary policy. The discount rate is the interest rate charged by Federal Reserve Banks to depository institutions on short-term loans. Reserve requirements are the portions of deposits that banks must...