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Monetary policy

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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, 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.

1. State the three ways in which the Federal Reserve can change the money supply and explain clearly how each approach is expected to work in changing money supply.
1a. Tool 1 and how it works in affecting money supply.
1a. Answer:
1b. Tool 2 and how it works in affecting money supply.
1b. Answer:
1c. Tool 3 and how it works in affecting money supply.
1c: Answer:

Parts 2 and 3 in table

Tool 2.Proposed change by Fed when economy growing too quickly 3. Proposed change by Fed in economic recession

4A What is the current condition of these tools (in our present day economy (cite sources of information)?
4B What changes, if any, would you make at the next meeting of the Federal Reserve?
4C. Explain why you would make the changes (or not make any) as stated in 4B and the benefits/drawbacks of this strategy.

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Solution Summary

How the Fed controls the money supply and why it pursues different policies at different times.

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The Fed uses open market operations, adjustment of the federal funds rate, and changes to reserve requirements, which is the percentage of deposits that banks must keep on hand, rather than loaning out.

To slow an overheated economy, the Fed needs to make money less available. It sells bonds which lowers the money available at lending institutions. It increases the federal funds rate, which makes banks less likely to borrow, and it also could increase reserve requirements which ...

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