Federal Reserve Term Paper

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1 Which of the monetary tools available to the Federal Reserve is most often used? Why?
Open market Operations
The one most frequently used tool is the open market operations. The buying and selling of U.S. government securities. This tool is directed by the FOMC and carried out by the Federal Reserve Bank of New York.
Discount window lending (Rate)
This is the interest rate charged by the Reserve Banks to commercial banks for short-term loans. Federal Reserve lending at the discount rate complements open market operations in achieving the target federal funds rate and serves as a backup source of liquidity for commercial banks. Lowering the discount rate is expansionary (expand money supply to encourage economic growth) because the discount rate influences other interest rates. Lower rates encourage lending and spending by consumers and businesses. Likewise, raising the discount rate is contractionary because the discount rate influences other interest rates. Higher rates discourage lending and spending by consumers and businesses. Discount rate changes are made by Reserve Banks and the Board of Governors.
Reserve requirements
Required portions of deposits that banks must hold in cash, either in their vaults or on …show more content…
When the Federal Reserve Bank decrease the discount rate, this generally results in a lowering of interest rates in the economy. Finally, a decrease in the reserve requirements, all else constant, results in an increase in reserves for all banks. . In two of the three cases (open market operations and reserve requirement changes), an increase in reserves results in an increase in bank deposits and assets. One immediate effect of this is that interest rates fall and security prices to rise. In the third case (a discount rate change), the impact of a lowering of interest rates is more
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