Question

a) Who comprises the federal Open market Committee and what role does this group serve in the economy?

b) What are the three primary tools the Federal reserve has to work within conducting Monetary policy and how does the use of these tools cause expansion and contraction in the size of the money supply?

Answer 1

1 - The FOMC consists of twelve members. Seven members are from the Board of governors , one is the governor of Federal bank of New York and other four members are on the rotation basis of one year.

The FOMC plays the role of stabalising the supply of money in the economy by purchasing or selling the government bonds in the open market. It determines the amount of these bonds to be sold or purchased in order to implement the expansionary or contractionary policy.

2 - Federal bank uses open market operation , reserve ratio and discout rate tool mainly to control the supply of money. When the government securities are sold in open market , reserve requirement and discount rate is increased , this is called contractionary policy and the money supply is reduced. If the bonds are purchased in open market , reserve ratio and discount rate is reduced , this is called expasnionary policy and this leads to rise in money supply in economy.