Which of the monetary tools available to the Federal Reserve is most often used? Why?
The Federal Reserve has three monetary tools called Open Market Operations, Discount Rates, and Reserve Requirements. From these three monetary policies, the Federal Reserve uses the Open Market Operations the most.
Since the Federal Reserve is unable to control inflation or unemployment directly, it buys and sells securities in the open market where various primary securities dealers compete. The transactions of the securities in the open market influence the volume of reserves in the banking system. By manipulating the volume of the reserves affects the interest rates, and these rates are at which the banks borrow money from each other. Controlling the reserves and lowering or raising the interest rates the …show more content…
The institutions normally get short term loans with discount, and these loans are to meet shortages of liquidity.
Finally, the central bank enacts expansionary monetary policy by decreasing the reserve requirements. When the Central Bank lowers the reserve requirements, the bank has more cash to lend to its customer at lower interests.
Opposed to expansionary monetary policy, we have the contractionary monetary policy. The contractionary monetary policy decreases the supply of a country’s currency, decreases bond prices, and increases rates.
Suppose the Federal Reserve purchases $10 billion worth of foreign currency in exchange for deposit accounts at the Federal Reserve. Show the changes that result from this transaction on the Fed’s balance sheet.
If the Federal Reserve purchases a foreign currency worth $10 billion, this will cause the foreign country to have less of its currency in the market. That foreign currency bought by the Fed will be placed in the reserve vault. The rate of the foreign currency will increase. (Radcliffe,
The Federal Reserve has three monetary tools called Open Market Operations, Discount Rates, and Reserve Requirements. From these three monetary policies, the Federal Reserve uses the Open Market Operations the most.
Since the Federal Reserve is unable to control inflation or unemployment directly, it buys and sells securities in the open market where various primary securities dealers compete. The transactions of the securities in the open market influence the volume of reserves in the banking system. By manipulating the volume of the reserves affects the interest rates, and these rates are at which the banks borrow money from each other. Controlling the reserves and lowering or raising the interest rates the …show more content…
The institutions normally get short term loans with discount, and these loans are to meet shortages of liquidity.
Finally, the central bank enacts expansionary monetary policy by decreasing the reserve requirements. When the Central Bank lowers the reserve requirements, the bank has more cash to lend to its customer at lower interests.
Opposed to expansionary monetary policy, we have the contractionary monetary policy. The contractionary monetary policy decreases the supply of a country’s currency, decreases bond prices, and increases rates.
Suppose the Federal Reserve purchases $10 billion worth of foreign currency in exchange for deposit accounts at the Federal Reserve. Show the changes that result from this transaction on the Fed’s balance sheet.
If the Federal Reserve purchases a foreign currency worth $10 billion, this will cause the foreign country to have less of its currency in the market. That foreign currency bought by the Fed will be placed in the reserve vault. The rate of the foreign currency will increase. (Radcliffe,