Question

1.please explain how the federal reserve's operating procedures limit fluctuation in the federal fund rate

2. Please make the case for and against an independent federal reserves

Answer 1

Answer-1)

The Federal Reserve uses conventional monetary policy tools during the normal times - reserve requirements, open market operations, and discount lending to control the money supply and rates of interest.

-- Reserve requirements: When the Fed increases the reserve requirement, it will cause an increase in the federal funds rate and when the Fed reduces the reserve requirement, it will cause a fall in the federal funds rate

-- Open market operations: An open market purchase results to decline in the federal funds rate and on the other hand the an open market sale results to an increase in the federal funds rate

-- Discount lending: When on the horizontal section of the supply curve there is an intersection of demand and supply; change in the rate of discount will shifts that portion of the supply curve and the federal funds rate may either increase or decrease depending on the change in the rate of discount.

As per policy we have to answer first question