Question

Briefly discuss what actions the U.S. Federal Reserve would likely take in pursuing an expansionary monetary policy using each of the following three monetary tools:

a. Reserve requirements.
b. Open market operations.
c. Discount rate.

Answer 1

The U.S. Federal Reserve uses three monetary tools to implement an expansionary monetary policy: reserve requirements, open market operations, and the discount rate.

Step-by-step explanation:

The U.S. Federal Reserve uses three monetary tools to implement an expansionary monetary policy: reserve requirements, open market operations, and the discount rate.

a. Reserve requirements:

When the Federal Reserve wants to stimulate the economy, it can lower the reserve requirements, which is the percentage of deposits that banks must hold on reserve. By lowering the reserve requirements, banks have more money available to lend out, which increases the money supply and encourages borrowing and spending.

b. Open market operations:

The Federal Reserve can also use open market operations to expand the money supply. In this process, the Federal Reserve buys government bonds in the open market from banks, which increases the reserves of the banks. The increase in reserves allows banks to make more loans, which increases the money supply.

c. Discount rate:

The third tool the Federal Reserve can use is the discount rate. The discount rate is the interest rate that the Federal Reserve charges banks for short-term loans. When the Federal Reserve wants to stimulate the economy, it can lower the discount rate, making it cheaper for banks to borrow money. This encourages banks to borrow more, which increases the money supply and promotes economic growth.