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Federal Reserve tools

What measures and tools does the Federal Reserve have at its disposal to address the economy. What has the Fed employed in the past 2 years to help the economy? Would you consider the measures you identified as effective or unsuccessful? What measures would you recommend at present?

Solution Preview

There are various tools available to the Federal Reserve to address the economy. The most important ones are the following:

1. Reserve Ratio
2. Discount Rates
3. Open Market Operations

To give further details start with the Reserve Ratios. Reserve Ratio is the percentage of deposits that commercial banks are required to keep in reserves at the end of every business day. This is the prime determinant of the money multiplier that determines how effective other policies of the Fed turn out to be. The money multiplier is given by

Money Multiplier = 1 / Reserve Ratio.

When the Fed increases the Reserve Ratio, the multiplier falls and changes in money supply do not have a big effect. When the Fed lowers the Reserve Ratio, the multiplier rises, and changes in money supply have big impacts. ...

Solution Summary

Federal Reserve tools are presented.

$2.19