What tools does the Fed have to pursue monetary policy?

 

When describing how banks create mony, answer the following question:

1)  Show how each of the following would initially affect a bank’s assets and liabilities.

  • Someone makes a $10,000 deposit into a checking account.
  • A bank makes a loan of $1,000 by establishing a checking account for $1,000
  • The loan described above is spent.
  • A bank must write off a loan because the borrower defaults.

 

When summarizing the Fed’s tools of monetary policy, answer the following question:

2) What tools does the Fed have to pursue monetary policy? Which tool does it use the most?

 

3)  Suppose the money supply is currently $400 billion and the Fed wishes to increase it by $100 billion.

  • Given a required reserve ration of 0.25, what should it do?
  • If it decided to change the money supply by changing the required reserve ratio, what change should it make?  Why may the Fed be reluctant to change the reserve requirement

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