What are the three monetary policy tools of the Fed? Briefly describe

What are the three monetary policy tools of the Fed? Briefly describe how each tool can be used to implement an expansionary monetary policy and a contractionary monetary policy.

What will be an ideal response?

ANSWER

Open market operations, the discount rate, and the reserve requirement are the three policy tools available to the Fed. Expansionary monetary policy: an open market purchase of government securities, a decrease in the discount rate, and a decrease in the reserve requirement will result in an increase in bank reserves. As the increase in bank reserves works through the fractional reserve banking system yielding an increase in the money supply. Contractionary monetary policy: an open market sale of government securities, an increase in the discount rate, and an increase in the reserve requirement will result in a decrease in bank reserves. As the decrease in bank reserves works through the fractional reserve banking system yielding a decrease in the money supply.