Question

Rank the Fed's monetary policy tools (discount window, open-market operations, and reserve requirements) from least commonly used (1) to most commonly used .

a) Discount window (1), open-market operations (2), reserve requirements (3)
b) Reserve requirements (1), discount window (2), open-market operations (3)
c) Open-market operations (1), discount window (2), reserve requirements (3)
d) Reserve requirements (1), open-market operations (2), discount window (3)

Answer 1

The Federal Reserve's most commonly used monetary policy tool is open market operations, followed by the discount window, with reserve requirements being the least used. Therefore, the correct ranking is open market operations, discount window, and reserve requirements.

Step-by-step explanation:

To rank the Federal Reserve's monetary policy tools from least to most commonly used, one must understand each tool's purpose and frequency of use. The discount window is a facility where commercial banks borrow reserves from the Federal Reserve, usually as a last resort or during times of financial stress. The reserve requirements mandate the amount of funds that a bank must hold in reserve against specified deposit liabilities. The open market operations, however, are the primary tool used by the Fed to manage the money supply and influence interest rates, specifically the federal funds rate, through the buying and selling of U.S. Treasury bonds.

Based on the information provided, the correct ranking is:

1. Reserve requirements (1)
2. Discount window (2)
3. Open market operations (3)

So the answer to the student's question is option c) Open-market operations (1), discount window (2), reserve requirements (3).