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three tools of monetary policy

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.

Solution Preview

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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