Question

What are the 3 main policy tools at the disposal of the Fed?

1) Monetary policy, Fiscal policy, and Exchange rate policy
2) Interest rate policy, Inflation targeting, and Open market operations
3) Quantitative easing, Discount rate policy, and Reserve requirements
4) Bank regulation, Government spending, and Tax policy

Answer 1

The three main policy tools used by the Fed are open market operations, reserve requirements, and the discount rate policy. These tools are utilized to manage the money supply and influence the economy.

Step-by-step explanation:

The three main policy tools at the disposal of the Federal Reserve (Fed) are:

1. Open market operations: This is the most commonly used monetary policy tool and involves the buying and selling of government bonds with banks to influence the quantity of bank reserves and the level of interest rates, particularly the federal funds rate.
2. Reserve requirements: This tool determines what level of reserves a bank is legally required to hold. By adjusting these requirements, the Fed can influence the amount of money that banks can lend.
3. Discount rate policy: The discount rate is the interest rate charged by the Fed on the loans it gives to other commercial banks. Manipulating this rate can affect the cost of borrowing for banks and, by extension, the rates they offer to consumers and businesses.