Final answer:
U.S. monetary policy aims to maximize employment, stabilize prices, and moderate long-term interest rates by targeting the federal funds interest rate through open market operations, which influences the overall economy by affecting borrowing costs.
Step-by-step explanation:
Understanding U.S. Monetary Policy
The U.S. monetary policy, administered by the Federal Reserve (often referred to as the Fed), strives to achieve three key objectives: to maximize employment, to maintain price stability, and to moderate long-term interest rates. This is accomplished by targeting the federal funds interest rate through open market operations. Adjusting this rate influences other interest rates, which in turn affect borrowing costs for consumers and businesses, overall economic activity, and consequently employment and inflation.
By keeping the inflation rate low and stable, the Fed minimizes the risk of exchange rate fluctuations and encourages domestic and international competition. During periods when the economy is growing too rapidly and inflation is a concern, the Fed may raise interest rates to cool down the economy. Conversely, when the economy is sluggish, the Fed may lower interest rates to stimulate investment and spending.
Since the financial crisis of 2008, monetary policy has seen significant changes, with the Federal Reserve greatly expanding its holdings of longer-term securities to put downward pressure on longer-term interest rates and support economic activity and job creation.