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The Federal Reserve has several tools at its disposal. These tools are monetary policy, the discount rate, and the reserve requirement. Monetary policy is the manipulation of the supply of money to increase or decrease the interest rate. If we think money as a good then there will be a price of borrowing money, which is the interest rate of money. The higher the interest rate the less people will want to borrow money, and the opposite is true, the lower the interest rate the more people will want to borrow money. As the change in money supply affects the value of the interest rate because as there is more or less of money the current pool of money becomes more or less valuable. As there is more money the interest rate will decrease because there will be more money floating around and if there is less money the interest rate will increase because there will be less money floating around. The Federal Reserve manipulates the money supply by selling or buying bonds. If the Reserve wants to increase the interest rate it will sell bonds. By selling bonds it is taking in cash or money into its vaults thus decreasing the quantity of money in circulation. If the Reserve wants to decrease the interest rate it will buy bonds. By buying bonds it is putting money into circulation increasing the quantity of money. The discount rate is the rate at which the Federal Reserve lends to banks. This rate directly affects the amount of money banks have which in turn affects the amount of money in circulation and the interest rate. The reserve requirement is the minimum value of reserves banks must keep in their vaults. Raising the requirement would limit the money supply and lowering the requirement would increase the money supply. Monetary policy is used the most because it is the easiest to control and its result is the easiest to predict. The outcomes of the other two policies are much harder to predict, and thus are not used as often when trying to stabilize the economy.
What else can I help you with?
What institution is responsible for conducting monetary policy?
federal reserve system
Which institution is responsible for conducting monetary policy in the US?
The Federal Reserve Bank
The interest rate policy is the component of?
monetary policy.........
Statement of problem of monetary policy in Nigeria?
the problems of monetary policy in Nigera
What is the difference between Tight monetary policy from easy monetary policy?
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What institution is responsible for conducting monetary policy?
federal reserve system
Which institution is responsible for conducting monetary policy in the US?
The Federal Reserve Bank
The interest rate policy is the component of?
monetary policy.........
Statement of problem of monetary policy in Nigeria?
the problems of monetary policy in Nigera
What is the difference between Tight monetary policy from easy monetary policy?
pic
When was Monetary Policy Committee created?
Monetary Policy Committee was created in 1997.
Who framed monetary policy?
reserve bank of India frames monetary policy
What is the tight monetary policy?
Tight monetary policy is the money policy with high interest rates and low supply.
Who frames Indian monetary policy?
reserve bank of india frames monetary policy
When the governments raise or lowers taxes it is one form of?
monetary policy ITS ACTUALLY FISCAL POLICY . CLOWN -_-
What does loosening monetary policy means?
Loose monetary policy is the money policy that has low interest rates and a high supply.
What is the purpose of the monetary policy?
The purpose of the International monetary policy is tho survey the global economy.
