QUICK REVIEW 15-1 The objective of monetary policy is to help the economy achieve a full-employment, noninflationary level of domestic output. The Fed has three main methods of monetary control, each of which works by changing the amount of excess reserves in the banking system: a. Conducting open-market operations (the Fed's buying and selling of government bonds to the banks and the public) b. Changing the reserve ratio (the percentage of commercial bank deposit liabilities required as reserves) c. Changing the discount rate (the interest rate the Federal Reserve Banks charge on loans to banks and thrifts) Open-market operations are the Fed's most important monetary control mechanism. QUICK REVIEW 15-2 The Fed is engaging in an easy money policy when it increases the money supply to reduce interest rates and increase investment spending and real GDP; it is engaging in a tight money policy when it reduces the money supply to increase interest rates and reduce investment spending and inflation. The steeper the money demand curve and the flatter the investment demand curve, the larger the impact of a change in the money supply on the economy. The main strengths of monetary policy are (a) speed and flexibility and (b) political acceptability;its main weaknesses are (a) potential reduced effectiveness during recession and (b) the possibility that changes in velocity will offset it. The Fed communicates changes in monetary policy by announcing changes it targets for the federal funds interest rate. In the past two decades, the Fed has quite successfully used alternate tight and loose money policies to stabilize the economy.