Describe the four distinct tools of policy that the Federal Reserve can use to influence the money supply. How would the Fed use each of these tools to either increase or decrease the money supply?
What will be an ideal response?
The Fed sets the discount rate, which is the interest rate it charges commercial banks for loans. The Fed can lower the discount rate to increase the money supply and raise the discount rate to decrease the money supply.
The Fed can change reserve requirements, which refers to the portion of deposits banks are required to keep and not loan to customers. By lowering the reserve requirement, the Fed can increase the money supply and by raising the reserve requirement it can decrease the money supply.
The Fed can engage in open market operations, which refers to the Fed's buying and selling of government bonds. The Fed can increase the money supply by purchasing bonds and can decrease the money supply by selling bonds.
The Fed pays interest on banks' required and excess reserve balances. The Fed can increase the money supply by lowering the interest rate it pays on these reserves and can decrease the money supply by raising the interest rate it pays on these reserves.
You might also like to view...
The lack of a long-run tradeoff between the unemployment rate and the inflation rate means the long-run Phillips curve is
A) horizontal. B) vertical. C) upward sloping. D) downward sloping. E) U-shaped, with higher inflation initially decreasing unemployment and then increasing it back to the natural unemployment rate.
During the 1990s, which of the following did NOT occur?
A) Private savings fell. B) Investment rose. C) The United States received capital inflows. D) Private savings was greater than investment for most of the 1990s.