Question

using the short-hand symbols ms, r, i, y, and md to demonstrate the effects of an expansionary monetary policy. what are the 4 federal reserve actions that can increase the ms and lower the interest rate back down?

Answer 1

To increase money supply (ms) and lower interest rates, the Federal Reserve can take four actions: open market operations, lower reserve requirements, lower the discount rate, and provide forward guidance.

Step-by-step explanation:

To increase the money supply (ms) and lower the interest rate, the Federal Reserve can take the following four actions:

1. Open Market Operations: The Fed buys government securities (bonds) from commercial banks and the public. This increases the reserves of banks, allowing them to lend more and increase the money supply.
2. Lower Reserve Requirements: The Fed can lower the percentage of reserves that banks are required to hold. This frees up more funds for lending, increasing the money supply.
3. Lower Discount Rate: The Fed can lower the interest rate at which it lends money to commercial banks. This encourages borrowing and increases the money supply.
4. Forward Guidance: The Fed can use communication to signal its intention to keep interest rates low for an extended period. This can influence expectations and lower long-term interest rates.