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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: