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three tools of monetary policy

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1. Describe the three tools of monetary policy.

2. Find an article that shows a change in the US monetary policy.

3. State the objective of this monetary policy.

4. Discuss the expected outcomes of that policy.

5. Summarize how this monetary policy has affected (is affecting) the economy through change in the money supply.

6. Explain how this monetary policy affects the money supply, interest rate, investment spending, aggregate demand, and equilibrium level of GDP.

7. Quote a sentence in your article that specifically refers to the monetary policy and provides evidence of its application that you indicated in question (6).

8. State the name of the article and place the link into your answer.

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1. Describe the three tools of monetary policy.
Open market operations are the purchases and sales of bonds by the Federal Open Market Committee. Bond purchases are used to expand the money supply, while bond sales are used to contract the money supply.
The reserve requirement of banks is the ratio of deposits that must be retained as reserves to satisfy withdrawal requests. The remainder of deposits is available to the bank to make loans. Through the lending capacity of the banking system, banks can create an amount of money equal to the reciprocal of the reserve ratio (1/reserve requirement).
The discount rate is the interest rate that the Federal Reserve charges banks to borrow funds to satisfy reserve requirements. When the Fed lowers the discount rate, banks are more likely to borrow from the Fed, which will increase the money supply. Conversely, and increase in the discount rate will provide a disincentive to borrow reserves from the Fed, which will decrease the money supply.
2. Find an article that shows a change in the US monetary policy. ...

Solution Summary

This solution locates and assesses an article that shows a change in the US monetary policy.

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The key objectives and what are the conventional monetary policy tools

3A) What are the key objectives and what are the conventional monetary policy tools does the Fed use to achieve those objectives?

Then you read the speech given by the Fed's Chairman Bernanke on Oct 11, 2011 at the Federal reserve Bank of Boston at this url link http://www.federalreserve.gov/newsevents/speech/bernanke20111018a.htm of the Fed's website to answer the following question 3B.

3B) Read the speech of the Fed Chairman Ben Bernanke he delivered on Oct 18, 2011 at the Federal reserve bank of Boston, which is available at this url link http://www.federalreserve.gov/newsevents/speech/bernanke20111018a.htm

After reading the contents of his speech topic, "The Effects of the Great Recession on the Central Banks' Doctrine and Practice", critically and briefly analyze the direction of changes in monetary policy practice of the Federal Reserve from its conventional monetary policy framework in the wake of the great recession the US economy currently faces.

Alternatively (for 3.b),
3.b. Read the following two news analysis on the effect of monetary policy actions on November 30, 2011 by China on the global market, including US stock market. Based on your knowledge on monetary actions and its impact on the economy, briefly analyze the connection between the reduction of reserve requirement by China's central bank and its economy plus the economy of the rest of the world, including the US economy.

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