Question

The Federal Reserve (Fed) exerts considerable control over the money supply. In your paper: Identify the tools the Fed uses to control the money supply (traditionally there have been three tools, but see this article (Links to an external site.) for a discussion of a new, fourth tool). Discuss how those tools can be used to control the money supply. Identify the tool the Fed uses most often and explain why the Fed seldom uses the other two. Discuss the most recent actions by the Fed. Evaluate those actions in terms of how they might affect your career decisions. For example, would the Fed actions make it better or worse to seek a job change or to leave the workforce and return to school, etc.).?

Answer 1

In order to control the money supply the Federal reserve uses the following four tools.

• Discount rate
• Open market operations
• Reserve requirements
• Interest on reserves

When the commercial banks borrow from central bank the interest rate charged is known as the discount rate. For increasing the money supply fed decreases the discount rate and for decreasing the money supply fed increases the discount rate which makes availability of funds difficult for commercial banks.

Open market operations refers to the exchange of government securities. If the fed plans to increase the money supply it will buy securities.

Reserve requirements refers to the amount of money that the commercial banks has to keep as reserves. If there are less reserves then more money will be supplied to the economy.

If the banks are holding excess reserves then these funds are paid an interest rate. For an expansionary monetary policy the interest rate will be lowered so that the banks keep less reserves.

Interest on reserves is the tool which now a days the central bank is using quite often for controlling the money supply. This is because it affects the rate of loan advanced as well as the rate of mortgage. It also can be adjusted in relation with the inflation rate.

Recently the federal reserve has opted for an expansionary monetary policy for boosting the economic activities.

It is advisable not to opt for a job change even though the federal reserve is trying to create more employment opportunities. This is because the rate of unemployment is increasing in the economy.