Question

The Federal Reserve uses three tools to set monetary policy through the banks. Identify these three tools and provide an example of how each tool affects individual consumers.

Answer 1

Answer:

The Federal Reserve three tools to set monetary policy through the banks are:

Discount Rate which is the interest rate that the Federal Reserve charges the banks in order to borrow the currency. The Discount rate is what the bank and many other institutions accept the monetary deposits to pay the borrowed amount of money from the Federal Reserve. If the Discount rate is decreased member banks borrow more money, and the banks will loan more money to the people. But if the discount rate is Increased, then member banks will get less money and the banks loan will be less for the people.

Reserve Requirement which is the percent of the banks deposits which must be kept as currency and coin on the bank. Banks and others of the financial entities will be required to keep an amount of the money on deposits to the Federal Reserve in order to cover the liabilities that can be against the deposits their customers make. If the Reserve Requirement is decreased, banks keep less money in the vault, but will loan more for the people. If they are increased, the banks will get more vault money and fewer loans available to people.

Open Market Operations are the Federal Reserve are the buying and selling of government securities bonds, which is considered to be the most significant of the three tools. If the Federal Reserve gives the bank the money for the bounds, more money will be made for the loans in the banks and there will be more money for the people. But if the Federal Reserve gets money from the banks then there will be fewer loans available to people by bank.