ABSTRACT
This chapter explores the limitations of monetary policy in a situation of financial crisis. It discusses on banks to create money and credit, the role of the Federal Reserve System (Fed) in the US economy. Also discusses the structure of the Federal Reserve System and the tools used by the Federal Reserve in periods of recession and inflation. Monetary policy is an attempt to influence the amount of money and credit in circulation. It often focuses on the rate of interest that must be paid to borrow money. The Fed uses its tools to raise or lower interest rates and to try to reduce inflation and unemployment. Federal Open Market Committee (FOMC) has the important function of buying and selling government bonds on the open market. The FOMC did not even exist until the 1930s; in the post-World War II period, it became the main body by which the Fed conducts monetary policy.
