Question

Which of the following is a potential monetary policy instrument for the Fed?

setting corporate profit rates

setting the inflation rate

setting mortgage interest rate

setting the discount rate

Answer 1

Option D.

The Fed uses three main monetary policy instruments to regulate the money supply and interest rates within the economy.

Setting discount rates, open market operations, setting reserve requirements etc are the three main tools used by Fed.

Discount rate refers to the interest rate charged by Fed for lending overnight loans to the financial institutions or banks.

When it increases this rate of interest, money supply decreases within the economy and when it decreases, the money supply Increases within the economy.