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AP/IB Economics
Welker
The Tools of Monetary Policy
In-class research activity
Introduction: Changes in the supply of money in an
economy can have major effects on the level of
economic activity, thus MONETARY POLICY provides
Central Banks with powerful tool for promoting the
achievement of the three macroeconomic objectives
of full employment, price level stability and economic
growth.
The question is, HOW does a Central Bank go about
changing the supply of money in a country’s commercial banking system?
In the United States, the Federal Reserve engages in three different practices that can be used
to change the supply of reserves in the nation’s banking system. These are:
● Engaging in Open Market Operations
● Changing the Required Reserve Ratio (RRR)
● Changing the Discount Rate
During today’s class, you will be divided into three groups, and asked to read about and
describe how each of the Fed’s monetary policy tools works. The resources you may use in
your research include:
● Welker’s text (Pearson Baccalaureate Economics) chapter 18, “Monetary Policy”
● Sections from The Federal Reserve’s Website:
○ Open Market Operations
○ Required Reserve Ratio
○ The Discount Rate
Your findings: In the space below, your group is to report on its research about the three tools
of monetary policy.
Open Market Operations:
1. Definition:
2. How it can be used to impact banks’ reserves and the interest rate:
3. What should the Fed do during a recession? Explain.
4. What should the Fed do during an inflationary period? Explain.
5. What is its relative importance to the other tools of monetary policy? T
Required Reserve Ratio
1. Definition:
2. How it can be used to impact banks’ reserves and the interest rate:
3. What should the Fed do during a recession? Explain.
4.
What should the Fed do during an inflationary period? Explain.
5. What is its relative importance to the other tools of monetary policy?
Discount Rate
1. Definition:
2. How it can be used to impact banks’ reserves and the interest rate?
3. What should the Fed do during a recession? Explain.
4. What should the Fed do during an inflationary period? Explain.
5. What is its relative importance to the other tools of monetary policy?
Expansionary Monetary Policy - Graphical analysis
Identify three actions by the Fed that could increase the money supply. Explain how
each tool impacts the money supply, the level of investment, AD and the nation’s
economy:
● OMO:
● Reserve Requirement:
● Discount Rate:
Contractionary Monetary Policy - Graphical analysis
Identify three actions by the Fed that could decrease the money supply. Explain how
each tool impacts the money supply, the level of investment, AD and the nation’s
economy:
● OMO:
● Reserve Requirement:
● Discount Rate: