List three main tools available to the federal to change the money supply in the economy?
Cool guy asked:
List three main tools available to the fed to change the money supply in the economy.
List three main tools available to the fed to change the money supply in the economy.
Which tool do you think is most commonly used?
If the fed wanted to increase the supply of money in the economy, would the fed buy or sell securities in the open market and what would be the first effect of this policy.
-in/decrease interest rates to encourage/discourage borrowing & lending *most important*
-sell certain bonds to hold large amounts of $ for future release ($ value goes^)
-kind of controls where money is used along with treasury
I think what you are looking for is:
1. Change the discount rate (rate at which banks borrow from Fed)
2. Change the Federal Funds Rate via “Open Market Transactions” (buying and selling gov’t bonds on the open market).
3. Changing the required reserve ration (the percentage of demand deposits that a bank must hold as reserves).
#2 is by far the most commonly used tool. Whenever you read about the Fed “changing the interest rate” they are referring to open market transactions & the Federal Funds Rate. Since they cannot set the rate directly, but do it indirectly by buying and selling bonds on the open market, they usually refer to the desired interest rate as the “target” rate.