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IIntroduction In order to promote national economic goals a central bank acts to influence the availability and cost of money and credit this is known as monetary policy The Fed has three main tools with which to carry out policy These instruments of monetary policy are open market operations discount policy and reserve requirements Open market operations are the Feds most important tool It causes a change in the monetary base When banks need to borrow money they borrow it from the Fed Discount policy denotes a change in the discount rate The tool that is used the least is reserve requirement changes It is not used often due to its power to tie up or to free resources The Fed uses these tools to reach economic targets and to stabilize the economy The United States economy has been growing over the past five years The Fed has implemented policy in order to combat byproducts of this growth such as inflation and other effects The present state of the economy has cha nged from the standard growth of the past and is now moving in a new direction II Background Information From 1995 until 1999 the United States economy was performing incredibly well In 1995 real gross domestic product increased slightly less than 1 percent over the year A rise in aggregate output was accompanied by a steady unemployment rate of 5 to 5 percent The consumer price index rose 2 percent 1996 saw a rise in real GDP by more than 3 percent Employment rose substantially and was followed by a wage increase There was a rise in prices but it was confined to the food and energy sectors Growth was strong in 1997 More quickly than had been anticipated the federal budget approached balance Inflation slowed and unemployment once again dropped In March of 1997 The FOMC raised the intended federal funds rate from 5 to 5 percent
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