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Major Tools for Directing Monetary Policy

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Identify or list the four major tools used to control monetary policy.

Describe how changes in the Fed's policy tools leads to expansionary and restrictive or contractionary monetary policies.

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The expert examines major tools directing monetary policy.

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1. The first is the establishment of reserve requirements for banks. This means that the Federal Reserve (the central bank, called the "Fed") can order all banks in its jurisdiction to keep a certain amount of cash in reserve. It cannot be loaned out. It must stay in the bank just in case loans do not get paid back. It is a sort of cushion; a form of insurance against bad economic times. If reserve requirements are ...

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