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---------------------------------------------------------------------------------------------------------- ECONOMIC CONCEPT the concept chosen is the effect of monetary policy on interest rates. Monetary policy refers to changes in money supply. FED employs a variety of tools to influence the amount of money that is available with banks to provide as credit. These tools include Discount rate It is the rate at which central bank loans money to commercial banks. Federal rate It is the rate at which banks give loans to each other for very short term. Open market operations They refer to purchase/sale of government securities which influence the amount of funds available with banks/public to supply as credit. A sale of securities reduces the amount available for credit purposes, while a purchase increases money supply. While each of the above tools has its own limitations and advantages, the discount rate is often taken as a sign of the stance of FED and FOMC on the state of the economy. FOMC is the policy making branch of the FED. It makes the important decisions on interest rates and other monetary policies This is generally the most commonly used tool to deal with economic fluctuations. It is fully in the control of FED and has little lags