Question

what is the primary tool used by the federal reserve when it responds to economic booms and recessions? responses buying and selling bonds in open market operations buying and selling bonds in open market operations printing money or destroying money previously printed printing money or destroying money previously printed changing the reserve requirements that control how many assets banks have to keep on hand changing the reserve requirements that control how many assets banks have to keep on hand changing the discount rate it charges when it lends money to banks

Answer 1

The Federal Reserve primarily uses open market operations as its tool to respond to economic fluctuations. This method, which involves buying and selling government bonds to influence bank reserves and interest rates, targets the federal funds rate to maintain economic stability.

Step-by-step explanation:

The primary tool used by the Federal Reserve when responding to economic booms and recessions is open market operations. This involves the buying and selling of government bonds with banks to influence the quantity of bank reserves and the level of interest rates.

The specific interest rate targeted in open market operations is the federal funds rate, which is the rate that commercial banks charge each other for overnight loans. Despite the name, the federal funds rate is an important short term interest rate that reflects credit conditions in financial markets well.

Open market operations are recognized as the most flexible and precise of the three traditional monetary policy tools, which also include reserve requirements and discount rates, making them the preferred method used by the central bank to steer the economy.