Which of the monetary tools available to the Federal Reserve is most often used? Why?
The Federal Reserve has many tools at its disposal to influence the money supply. There are 3 main tools, which are Reserve requirement, Discount rate (Discount loans), and Open market operations. Let’s talk first about this main 3.
Reserve requirements are, “requirements regarding the amount of cash a bank must hold in reserve against deposits made by customers. This money must be in the bank's vaults or at the closest Federal Reserve bank. Set by the Fed's board of governors, reserve requirements are one of the three main tools of monetary policy — the other two tools are open market operations and the discount rate.” (Investopedia)
Discount rate is, “The …show more content…
Lender of last resort, this is, “an individual, a private institution, or, more commonly, a government central bank that attempts to stop a financial panic and/or postpanic de-leveraging by increasing the money supply, decreasing interest rates, making loans, and/or restoring investor confidence.” (Money and Banking)
Bailout, these ones usually occur, “after the actions of a lender of last resort, such as a central bank, have proven inadequate to stop negative effects on the real economy.” (Money and Banking) They, “entail restoring losses to one or more economic agents.” (Money and Banking)
Money supply, this one is, “the entire stock of currency and other liquid instruments circulating in a country's economy as of a particular time” (Investopedia) This one can be considered a tool because the Federal Reserve can alter it, and if the money supply decreases, interest rates raise, and vice …show more content…
And How is this achieved? There are different ways to do so, and they are, in some manner, correlated. For example, the increase in money supply is one way, increasing the money supply will literally put more money in the market, and more money in the market means more investments, this one leads to a second expansionary activity, which is lower interest rates, let’s remember they both are correlated, when money supply increases, interest rates decrease and vice versa, this lower interest rates attract people to acquire loans because now there is a greater credit availability, which is another expansionary activity, greater credit availability can be seen as a “surplus” and as commonly known as the law of supply and demand, when there is a surplus of something, prices tend to go down, so now that there is a greater credit availability, people react to it. Then we have security prices, for example, bond prices. Let’s remember that interest rates and bond prices are inversely related, which means that when interest rates increase, bond prices
The Federal Reserve has many tools at its disposal to influence the money supply. There are 3 main tools, which are Reserve requirement, Discount rate (Discount loans), and Open market operations. Let’s talk first about this main 3.
Reserve requirements are, “requirements regarding the amount of cash a bank must hold in reserve against deposits made by customers. This money must be in the bank's vaults or at the closest Federal Reserve bank. Set by the Fed's board of governors, reserve requirements are one of the three main tools of monetary policy — the other two tools are open market operations and the discount rate.” (Investopedia)
Discount rate is, “The …show more content…
Lender of last resort, this is, “an individual, a private institution, or, more commonly, a government central bank that attempts to stop a financial panic and/or postpanic de-leveraging by increasing the money supply, decreasing interest rates, making loans, and/or restoring investor confidence.” (Money and Banking)
Bailout, these ones usually occur, “after the actions of a lender of last resort, such as a central bank, have proven inadequate to stop negative effects on the real economy.” (Money and Banking) They, “entail restoring losses to one or more economic agents.” (Money and Banking)
Money supply, this one is, “the entire stock of currency and other liquid instruments circulating in a country's economy as of a particular time” (Investopedia) This one can be considered a tool because the Federal Reserve can alter it, and if the money supply decreases, interest rates raise, and vice …show more content…
And How is this achieved? There are different ways to do so, and they are, in some manner, correlated. For example, the increase in money supply is one way, increasing the money supply will literally put more money in the market, and more money in the market means more investments, this one leads to a second expansionary activity, which is lower interest rates, let’s remember they both are correlated, when money supply increases, interest rates decrease and vice versa, this lower interest rates attract people to acquire loans because now there is a greater credit availability, which is another expansionary activity, greater credit availability can be seen as a “surplus” and as commonly known as the law of supply and demand, when there is a surplus of something, prices tend to go down, so now that there is a greater credit availability, people react to it. Then we have security prices, for example, bond prices. Let’s remember that interest rates and bond prices are inversely related, which means that when interest rates increase, bond prices