Question

Which of the monetary tools available to the Federal Reserve is most often used?

a) Open market operations
b) Discount rate
c) Reserve requirements
d) Quantitative easing

Answer 1

The most often used tool by the Federal Reserve for conducting monetary policy is open market operations, which involves the buying and selling of government bonds to influence interest rates.

Step-by-step explanation:

The open market operations are the most often used monetary tool by the Federal Reserve. This involves buying and selling government bonds with banks to regulate the money supply and influence interest rates, particularly the federal funds rate. Open market operations are utilized to achieve a specific short-term interest rate and are considered the primary tool for managing the liquidity in the financial system.

During the 2008 recession, when short-term interest rates were at near-zero and conventional open market operations were not sufficient to stimulate the economy, the Federal Reserve adopted quantitative easing (QE). QE differed from standard monetary policy as it involved the purchase of long-term government and private mortgage-backed securities to make credit available and stimulate aggregate demand. However, QE is considered a nontraditional policy and is not the tool most commonly used in regular circumstances.