Explain two of the Fed's main tools of monetary policy and how each is used to...

Explain two of the Fed's main tools of monetary policy and how each is used to change the money supply if the Fed wants to do expansionary monetary policy.

Solutions

Expert Solution

Answer : For expansionary monetary policy Fed use the following two main tools to change the money supply :

I) Fed purchase bonds and securities through the open market operation.

II) Fed reduce the required reserve.

If Fed purchase bonds and securities through the open market operation then the money supply increase in the economy. As a result, interest rate will decrease which will increase the consumption and investment. Due to increase in consumption and investment the aggregate demand increase which shift the AD curve to rightward. As a result, the economy reach at potential output level. Thus, Fed use open market operation tool to change the money supply for expansionary monetary policy.

If Fed reduce the required reserve then Commercial banks get more money to lend. As a result, the money supply increase in the economy which decrease the interest rate. Due to lower interest rate the consumption and investment increase. As a result, the aggregate demand increase which shift the AD curve to rightward and the economy reach at potential output level. Thus, Fed use required reserve tool to change the money supply for expansionary monetary policy.

Rahul Sunny answered 1 year ago

Next > < Previous

Related Solutions

Define the term monetary policy tools. Explain how each monetary policy tool is used. Provide an...

Define the term monetary policy tools. Explain how each monetary policy tool is used. Provide an example of a real-life application in which the Federal Reserve Banking System would use contractionary monetary policy over expansionary monetary policy. Discuss which monetary policy is used most often and why.

List and explain the four major tools of monetary policy. Discuss how each is used in...

List and explain the four major tools of monetary policy. Discuss how each is used in terms of stages of the business cycle-- specifically in the expansion and recession phases. Also review text readings on this topic and summarize these readings.

Explain the three major tools of monetary policy. Discuss how each is used in terms of...

Explain the three major tools of monetary policy. Discuss how each is used in terms of stages of the business cycle-- specifically in the expansion and recession phases?

Use one of the traditional monetary policy tools to explain how monetary policy may be used...

Use one of the traditional monetary policy tools to explain how monetary policy may be used by the Federeal Open Market Committee to close recessionary and inflationary gaps by changing money supply, interest rates, investment and gross domestic product (GDP) . You must use two graphs of money supply-demand, investments and GDP to illustrate your explanations

Tools of Monetary Policy: Name two nonconventional monetary policy tools and briefly explain what they are?

1. Explain about the main goals of the Fed's monetary policy in terms of three primary...

1. Explain about the main goals of the Fed's monetary policy in terms of three primary macroeconomic indicators. 2. Explain about the tradeoff between the Fed's short-run and long-run goals, i) when it implements an expansionary monetary policy and ii) when it implements a contractionary monetary policy. Essay Format at most 500 words

) What are the four principal tools of monetary policy? Explain how they can be used...

) What are the four principal tools of monetary policy? Explain how they can be used to correct for different phases of the business cycle.

• The role of fiscal & monetary policy and how both tools are used by in...

• The role of fiscal & monetary policy and how both tools are used by in setting, evaluating and changing economic policy.

1. The two main tools of macroeconomic policy include monetary policy and fiscal policy. Briefly describe...

1. The two main tools of macroeconomic policy include monetary policy and fiscal policy. Briefly describe the main components of each.

The Fed's monetary policy tools to eliminate a recession include: Question 18 options: Lowering the reserve...

The Fed's monetary policy tools to eliminate a recession include: Question 18 options: Lowering the reserve requirement, cutting the discount rate, and raising the margin requirement Lowering the required reserve ratio, raising the discount rate, and raising the margin requirement Lowering the required reserve ratio, raising the discount rate, and selling government bonds on the open market Lowering the required reserve ratio, cutting the discount rate, and selling government bonds on the open market Lowering the reserve requirement, lowering the...

Subjects