Question

In your own words; explain the three main monetary policy tools the Fed uses to try to prevent inflation and recession.

Answer 1

The three main monetary tool used by the Fed are:

• Discount rate: It is the rate at which the Fed gives loans to the banks and act as a lender of last resort in the market. if there is inflation then this rate is increased and if the inflation is low then this rate is lowered.
• Reserver ratio, this is the ratio of the total deposit that the banks have to keep with them, if the reserves are increased then the money supply fall and if the reserve ratio is decreased then the money supply is increased.
• Open maket operation: Banks sells the government bonds to maintain the money supply in the market.