Question

Which of the following are tools used by the Fed to manage inflationary and employment concerns? I. Direct market intervention by buying and selling Treasuries. II. Changing member bank reserve requirements. III. Printing and distributing fiat currency. IV. Raising or lowering the Federal Discount Rate. Only I, II and IV are correct Only I and II are correct. All are correct. Only III is false. All are false.

Answer 1

Following are the tools used by Fed to manage inflationary and employment concerns .-

I. Direct Market Intervention by buying and selling Treasuries

II. Changing member bank reserve requirements

IV. Raising or lowering the federal Discount rate

Thus, Only I,II and IV are correct.

One of the main reason for inflation is excess supply of money in the market and to control inflation Fed has to pool back excess money in the market, for this Feb uses above tools. For example, Fed may sell the Treasuries to pool the money from the market or increase the members bank reserve requirements so they have to keep money resulting low supply of money in the market or Fed may increase the discount rate which make Fed loan to member banks costly resulting low supply of money in the market.