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    Federal Reserve 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.

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    Solution Preview

    1. Describe three ways in which the Federal Reserve can change the money supply.
    Changing the current ratio, changing the interest rate and open market transactions.
    The Federal Reserve has three main tools for maintaining control over the supply of money and credit in the economy. The most important is known as open market operations, or the buying and selling of government securities. To increase the supply of money, the Federal Reserve buys government securities from banks, other businesses, or individuals, paying for them with a check (a new source of money that it prints); when the Fed's checks are deposited in banks, they create new reserves -- a portion of which banks can lend or invest, thereby increasing the amount of money in circulation. On the other hand, if the Fed wishes to reduce the money supply, it sells government securities to banks, collecting reserves from them. Because they have lower reserves, banks must reduce their lending, and the money supply drops accordingly.
    The Fed also can control the money supply by specifying what reserves deposit-taking institutions must set aside either as currency in their vaults or as deposits at their regional Reserve Banks. Raising reserve requirements forces banks to withhold a larger portion of their funds, thereby reducing the money supply, while lowering ...

    Solution Summary

    The object of the Federal Reserve monetary policy is emphasized.

    $2.19