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    Monetary tightening or Monetary loosening

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    The Fed loosened monetary policy in various ways in 2007, but has recently started tightening monetary policy again. Explain how each instrument they have used works and whether it is a loosening or tightening policy. (1 sentence explanation):

    1) Lower the target federal funds rate: monetary tightening or loosening?

    2) Lower the cost of discount window lending: monetary tightening or loosening?

    3) The Fed pays banks a positive interest rate on the reserves they hold at the Central Bank: monetary tightening or loosening?

    4) Offer discount window access to a broader range of financial institutions: monetary tightening or loosening?

    5) Implementing an open market purchase of bonds: monetary tightening or loosening?

    6) Purchasing Mortgage-Backed Securities: monetary tightening or loosening?

    7) Purchasing medium maturity Treasury Bonds (QE2): monetary tightening or loosening?

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    Solution Preview

    Answer:
    1) Monetary loosening: Lowering the target federal funds rate is monetary loosening because with lower fund rate Fed increases money supply in the system.
    2) Monetary loosening: Lowering the cost of discount window lending is monetary loosening because it relieves liquidity strains for individual depository ...

    Solution Summary

    This solution helps to differentiate between monetary tightening and monetary loosening.

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