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Monetary Policy: The Three Tools of the Federal Reserve

Assuming the Federal Reserve chooses to shrink the money supply, explain how each of the three tools would be used.

Solution Preview

The Federal Reserve uses three main monetary policy tools:

1. Open market transactions
2. Change in the required reserve rate
3. Change the discount rate

To shrink the money supply, the Fed ...

Solution Summary

This solution identifies each of the three main monetary policy tools of the Federal Reserve and explains how each one would be used to shrink the money supply.