Economics in a Global Environment - Federal Reserve
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Questions: Describe three ways in which the Federal Reserve can change the money supply. 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? If the Federal Reserve is going to adjust all of these tools during an economic recession, what changes would they make? 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. Describe each tool and how it is used to achieve it desired effect on the US money supply
State how the FED will use each tool to achieve the desired effect on the US money supply
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Describe three ways in which the Federal Reserve can change the money supply.
The first way is the open market purchases of government securities. The government can either buy or sell government securities. If it sells government securities, there will be a contraction in the supply of money and if it buys government securities, it increases the supply of money in the market. The second way is that the Federal Reserve can either lower or increase the discount interest rate. If it lowers the discount rate and so lowers the costs for banks it increases the supply of money. On the other hand, if it increases the discount interest rate then this leads to a contraction in the supply of money. Third, it either lowers the required reserve rate or increases the required reserve rate, in case it increases the required reserve rate there is a fall in the supply of money and if it decreases the required reserve rate, it increases the multiplier effect of high powered money and this increases the supply of money.
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?
If the economy is growing too fast, it means that there ...
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