This paper outlines and clarifies the three tools used by the Federal Reserve to manipulate monetary supply. It discusses which tool is used during economic growth and recession, as well as examines the potential benefits of changing current strategies. The three distinctive tools are: 1) The discount rate, in which individual member banks are charged for short-term loans; a lower rate stimulates economic growth while an increase reduces profitability of borrowing from the Federal Reserve, ultimately decreasing money circulation. 2) Open market operations involve buying or selling government securities to increase or decrease reserves of member banks; an increase encourages lending and economic growth while a decrease discourages lending and leads to decline in economic growth. 3) The reserve requirement ratio pertains to minimum required reserves each member bank must maintain at their Federal Reserve
...Bank.According to org (2006), member banks can lend less money when the reserve requirement ratio is increased. The Federal Reserve has multiple tools at its disposal for affecting economic change, including open market operations and reserve requirements. Open market operations directly buy and sell US government securities on the open market in order to impact the federal fund rate. Reserve requirements mandate that a portion of member bank deposits be held in regional reserve banks or their own vaults. When there is a quickly growing economy, measures such as increasing the bank rate, selling government securities, and increasing variable reserves are used to decrease the supply of money and curb inflation. Conversely, during an economic recession, measures such as decreasing the bank rate, buying securities from certain banks to increase money supply, and reducing variable reserves are used to inject
credit and money into the economy. Overall, despite changes in the banking industry over time, the Federal Reserve has consistently performed well with its adapted methods so further changes may not be necessary.According to Susan Philip, the Federal Reserve's tools are crucial in banking and have resulted in noticeable improvements. She also emphasizes that these tools' procedures are advantageous for the growth of the banking sector (Phillips, 1997). References: Federal Reserve - Monetary Policy [Electronic Version] from http://www.federal-reserve.org/monetary-policy.htm, Phillips, S. M. (1997). The Federal Reserve's supervisory processes [Electronic Version] from http://www.federalreserve.gov/BOARDDOCS/TESTIMONY/1997/199710082.htm#pagetop, SolutionLibrary.com.(2006). Sample Economics Solution [Electronic Version] from http://www.solutionlibrary.com/samples/view_sample.php?posting_id=41824.
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