Ways in Which the Federal Reserve Can Change the Money Supply
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Describe three ways in which the Federal Reserve can change the money supply.
If the Federal Reserve is going to adjust all of these tools during an economy that is growing too quickly, what changes would they make?
If the Federal Reserve is going to adjust all of these tools during an economic recession, what changes would they make?
What changes, if any, to the current condition of these tools would you make at the next meeting of the Federal Reserve? Explain why and the benefits/drawbacks of this strategy.
Objective: Identify current trends in macro and microeconomics.
Analyze the relationship between fiscal and monetary policy in an open economy.
Critically analyze the role of government in a market economy.
Use effective communication techniques.
There are three tools. See chapter 14. Use the link to the FED; the link is posted to Questions Asked and Answers Shared for Unit 5 Describe each tool and how it is used to achieve it desired effect on the US money supply State how the FED will use each tool to achieve the desired effect on the US money supply in Part 2 State how the FED will use each tool to achieve the desired effect on the US money supply in Part 3 In part 4 comments on the current FED policy; make any suggestions that you believe should be considered by the FED. Before you submit the assignment, look for each of the tools in part 2 and in part 3. If you do not read each tool in part 2 and in pat 3, the assignment is incomplete.
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Federal Reserve Bank and Monetary Policy
Federal Reserve can change the supply of money in the following three ways:
The U.S. government securities from financial institutions can be purchased by the Federal Reserve through the creation of funds or credits on their balance sheets in return for the securities. There are new liquid reserves in the books of the banks equal to the extent that these securities are purchased directly from the banks.
The use of the discount rate is also made by the Federal Reserve Bank to change the supply of money in the economy. It is the interest rate that is charged by the Fed on the loans advanced by it to the banks. By instigating a decrease or increase in this rate, the Fed can encourage or discourage the banks to borrow the funds created by it and therefore, can increase or decrease the loans given to the public.
By changing the quantity of the liquid reserves that are required by the banks to be maintained, the money supply can be controlled by the Federal Bank. Clearly, if the reserve requirements are higher, fewer funds are available to advance new loans (Johnson, 2002).
The Federal Reserve can change these tools ...
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- BBA, University of Rajasthan
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