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Monetary Policy: The Three Tools of the Federal Reserve

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

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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.

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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 ...

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