Question

If the Fed wanted to raise the money supply, how should it use each tool? ?

If the Fed wanted to raise the money supply, how should it use each tool? ?

Homework Answers

Answer #1

If the Fed wanted to increase the money supply it will use each tool in the following way:

  • Open market operation: the Fed will buy more and more bonds from the market and general public. It will release more money in the market and increase the money supply in the market.
  • Reserve rate: reserve rate the amount of funds the banks always have to keep with them. IF the reserve rates are low that means the funds with the banks are less and they can lend more increasing the money supply.
  • Discount rate: They are the rates at which the Federal bank lend the money to the banks. to increase the money supply they will reduce the rates and this will allow the banks to get more funds at a cheaper rate.
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