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    Federal Reserve

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    1. Describe three ways in which the Federal Reserve can change the money supply.

    2. 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?

    3. If the Federal Reserve is going to adjust all of these tools during an economic recession, what changes would they make?

    4. What changes, if any, would you make to these tools at the next meeting of the Federal Reserve? Explain why and the benefits/drawbacks of this strategy.

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    Solution Preview

    1. Describe three ways in which the Federal Reserve can change the money supply.
    Policy instruments to control the money supply:
    - Reserve requirements: Requirements as to the amount of funds that commercial banks and other depository institutions must hold in reserve against deposits to provide protection against deficiencies and overdrafts. (Depositories are financial institutions that obtain funds mainly through deposits by the public, like banks.)
    - The discount rate: The interest rate charged commercial banks and other depository institutions when they borrow reserves from a district Federal Reserve Bank.
    - Open market operations: The buying and selling of U.S. government securities in the open market to influence the level of reserves in the ...

    Solution Summary

    The monetary policy decision is assessed.

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