Explain how each of the three tools of monetary policy may be used by the Fed to expand and to contract the money supply. Good internet sources:
[FRB on Monetary policy and monetary policy instruments:
"Monetary policy is made by the Federal Open Market Committee, which consists of the Board of Governors of the Federal Reserve System and the Reserve Bank presidents."
By use of monetary policy how would your increase employment in the economy and GDP? List and define the problems and complications of monetary policy.
The three tools of monetary policy are:
* Open Market Operations
* Reserve Requirements
* Discount Window Lending
Open market operations involve the buying and selling of treasury bills. When the Fed buys treasury bills it increases the flow of money in the market. Higher money supply lowers the interest rate, and this in turn pushes up investment and consumption. Thus AD goes up as both investment and consumption are components of AD. Higher AD leads to higher GDP and hence such a policy is termed expansionary policy. On the other hand if the Fed decides to sell treasury bills it sucks cash out of the market. This lowers the money supply and increases ...
The tools of monetary policy are embedded.