Download 1. What are the three tools of monetary policy? Open market

1. What are the three tools of monetary policy? Open market operations, the discount rate, and the reserve
requirement
2. Explain each of the three tools of monetary policy.
a. Open Market Operations – the buying and selling of government securities. If Fed concerned about
Inflation, the Fed would sell bonds; if the Fed is concerned about recession, the Fed would buy bonds
b. Discount Rate – The interest rate the Fed charges banks when banks borrow money from the Fed. If
concern is Inflation, Fed would Increase Discount Rate; If Fed concerned about Recession, Fed Decrease
Discount rate
c. Reserve Requirement – The percentage of checkable deposits the Fed requires banks to hold in reserve. If
Fed concerned about inflation, they would increase the reserve requirement; if the Fed concerned about
recession, the Fed could lower the reserve requirement.
3. If a commercial bank borrows money from the Federal Reserve, what is the rate called? Discount Rate
4. If the Fed implemented “tight money policy” what would this mean? Concern is Inflation. Give an example of
how the Fed would use one of the tools to implement a tight money policy. See #2 above.
5. If the Fed implemented easy money policy, give an example of a tool the Fed would use and how they would use
it to implement easy money policy. Easy money policy same as expansionary money policy, which is what the
Fed would use if concern if recession – See question 2 above.
6. If the Reserve Requirement is 8%, how much would a bank be required to hold in reserve if the total checkable
deposits were $55,000? $55,000 X .08 = $4,400 is amount bank would be required to hold in reserve. Bank could
loan $50,600.
7. The Federal Reserve is made up of ____12____ districts. Atlanta is in which district? 6
8. What are the tools of Fiscal Policy? Taxes and Government Spending
9. Who controls Fiscal Policy? The Government
10. Who controls Monetary Policy? The Federal Reserve
11. Explain the difference between the functions of money (Medium of Exchange, Unit of Account, and Store of
Value). Give one example of each.
a. Medium of Exchange – You are making a purchase
b. Unit of Account – you are comparing prices or each item has a dollar value.
c. Store of Value – You are saving money