Question

What is monetary policy ( be specific) and how is it different from the "lender of last resort" function performed by the FR (Federal Reserve)?

Answer 1

Monetary Policy is an macroeconomic policy which is adopted by the central bank, currency board and other regular committee of a nation. It has three major economic goals : attaining maximum sustainable employment, maintaining stable prices and achieving moderate long-term interest rates. The three major tools used in monetary policy are : open market operations, discount rate and reserve requirements. It controls money supply of an economy which controls the inflation of an economy. Money supply is controlled by either selling or purchasing government bonds in other nation, adjusting discount rate and by increasing/decreasing reserve requirements of depository institutions.

It is different from "lender of the last resort" function performed by the Federal Reserve as lender of the last resort is the function in which loans are landed by The Federal Reserve to a bank or other eligible institutions which are on the verge to shut down and no other options are available for them to raise fund anymore. This function is used to save a bank or financial institutions whereas Monetary policy is used to control the money supply in an economy and hence control inflation which is price levels of products and services. Both functions are performed by the Federal Reserve but both have different objectives.