Question

if the strategy is formulated what monetary tool is most useful? explain your choice

Answer 1

The three main monetary tools available to central banks are:

1. Open Market Operations: Open market operations refers to buying and selling of government securities for short term. When the central bank buys securities, it adds cash to the banks' reserves. That gives them more money to lend. When the central bank sells the securities, it places them on the banks' balance sheets and reduces its cash holdings. The bank now has less to lend
2. Reserve Requirement : The reserve requirement refers to the money balance banks must keep on hand overnight. They can either keep the reserve in their vaults or at the central bank. A low reserve requirement allows banks to lend more of their deposits. A high reserve requirement gives banks less money to lend.
3. Discount Rate : The discount rate is the third tool.13 It's the rate that central banks charge its members to borrow at its discount window. Since it's higher than the fed funds rate, banks only use this if they can't borrow funds from other banks.

Central bank tools work by increasing or decreasing total liquidity. That’s the amount of capital available to invest or lend. It's also money and credit that consumers spend.