Student Question

The Federal Reserve has tools for monetary control that all contribute significantly to the economic business cycle.   What are they?

Expert Answers

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The Federal Reserve System (better known as the Fed) is the driving force in monetary policy for the United States.  It has a number of tools that it can use to influence monetary policy and the supply of money.  These include:

  • Reserve requirements.  The Fed is responsible for telling banks what percentage of their deposits must be kept in the bank and what percentage can be loaned out.
  • Open market operations.  The Fed buys and sells government securities.  When it buys securities, it increases the money supply.  When it sells, it reduces the money supply.
  • Interest rates.  The best known of the Fed's tools is its ability to set the discount rate.  This is an interest rate that it charges when it loans money to banks.  This rate tends to affect the rates that banks charge.

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