Question

discuss the three tools of Fed's Monetary Policy.

Answer 1

The three tools of the Fed's Monetary Policy are:

1) Open market operations: The Fed buys and sells government securities under open market operations to increase and decrease the money supply in the market. So when Fed buys the government securities, it increases the money supply through issuance of new money in the market which results in higher liquidity.

2) Discount rate: The fed increases and decreases the interest rates on the loans made to banks , so when it raise rate, there will be increase in interest rates in the economy which can discourage borrowings in the economy and vice versa.

3) Reserve requirements: This means when Fed reduces the reserve requirements as percent of deposits, that means the banks have more money for loans so liquidity in the economy increases and vice versa.

The above is answer..