Question

Unit 6 lesson 7- monetary policy tools

Answer 1

1. The portion of a deposit that a bank must keep on hand. The required reserve ratio is a central bank regulation applied by most central banks. It sets the minimum amount of reserves that a commercial bank is required to hold.

2. It can be disruptive to the whole banking system. Central banks rarely raise the reserve requirements because it would create immediate liquidity problems for banks with low excess reserves.

3. By reducing the discount rate. When the economy gets slow, the Fed boosts growth and the money supply by decreasing reserve requirements and reducing the discount rate.

4. The sale decreases the money supply.

5. Open market operations. In order to implement their monetary policy, the Fed regularly favors the use of open market operations: buying and selling government-issued bonds.

Answer 2

The answers are the following:
1. It is the portion of a deposit that a bank must keep on hand.
2. Because it can be disruptive to the whole banking system.
3. He encouraged the bank through reducing the discount rate.
4. The sale decreases the money supply.
5. Open market operations is the policy used most by the Fed change the money supply.