ABSTRACT
This chapter explores the limitations of monetary policy in a situation of financial crisis. It examines the mechanics of money creation, the role of credit, and the workings of the Federal Reserve System, the US Central Bank. The chapter discusses how banks create money and credit; the role of the Federal Reserve System in the US economy; and the structure of the Federal Reserve System. It also discusses the tools used by Federal Reserve, and a discussion of how and why they are used in periods of recession and inflation. Monetary policy is an attempt to influence the amount of money and credit in circulation. Monetary policy conducted by Fed has significant limitations in its ability to accomplish its goals. This is particularly true if the Fed wishes to use monetary policy to reduce unemployment and stimulate more rapid economic growth. Most economists have argued that the Fed should be independent of "politics", as represented by the president and Congress.
