UNit 5 IP 2 ..Describe three ways in which the Federal Reserve can change the money supply.

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Running head : Unit 5 IP 2

Unit 5 IP 2

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Unit 5 IP 2

Introduction

This tends to define and explain the three types of tools used by the Federal Reserve in to change the monetary supply . It is discussed in this what type of tool do the Federal Reserve use whenever economical growth occurs . It is also discussed in this which type of tool is used whenever economic

recesses occurs . In this , matters about the future strategy or style of the current tools will also be discussed so as to the explanation why it should be changed and the benefits that this said change or changes would bring

Three Distinctive Tools of the Federal Reserve

The discount rate

In this tool , the Federal Reserve Banks do a charging to their individual member banks for the means of short-term kind of loans . It is explained through example that if the Federal Reserve descends the discount rate , it becomes more profitable or productive because by this means the Fed is said to be putting money into the economical circulation . On the other hand , if Fed decides to lessen the money circulating in the economy , they could elevate the rate of discount by this means they tend to lessen the profit of banks through borrowing money from the Federal Reserve . This act provides more cash on the Federal Reserve 's deposit making the money in the economical circulation lesser ADDIN EN .CITE orgFederal-Reserve orgFederal Reserve - Monetary Policy2006http /www .federal-reserve .org /monetary-policy .htm (org , 2006

The open market operation

This tool is said to be the one that Fed prefers in the means of effecting economic change . This tool explains the buying and selling of the united state government securities directly on the open market . Its purpose is to affect certain federal fund rate ADDIN EN .CITE orgFederal-Reserve orgFederal Reserve - Monetary Policy2006http /www .federal-reserve .org /monetary-policy .htm (org , 2006

The reserve requirement

This tool explains the part of a certain member bank 's particular deposits which must be hold on their own regional reserve banks or in the member bank 's own vaults ADDIN EN .CITE orgFederal-Reserve orgFederal Reserve - Monetary Policy2006http /www .federal-reserve .org /monetary-policy .htm (org , 2006

Adjustment on a quickly growing economy

If the economy is quickly growing , the Fed would bind and decrease or reduce the supply of money and they could adjust through doing rise in the bank rate , through selling of government securities to certain banks in to curb inflation and also to contact the said money supply and lastly , they could increase the ratio of the variable reserve such as statutory liquidity ratio and also cash reserve ratio ADDIN EN .CITE SolutionLibrary .comSolutionLibrary .com Sample Economics Solution2006http /www .solutionlibrary .com /samples /view_sample .php ?posting _id 41824 (SolutionLibrary .com , 2006

Adjustment during an economic recession

If economic recession occurs , the Fed adjust...