5. Use Table 5, below, to list the 4 tools available to the Federal Reserve to i
ID: 1120853 • Letter: 5
Question
5. Use Table 5, below, to list the 4 tools available to the Federal Reserve to influence the money suppl;y and thento indicate, for each, howthe Federal Reserve could use the tool to increase or decrease the money supply.(8 points this section) Table 5 Tool available to the Fedr To increase the money supply,To decrease the money supply the Federal Reserve should the Federal Reserve should Reserve Open market operations (buy or sell) Discount rate (increase or decrease) Reserve ratio (increase or decrease) Interest paid onreserves (increase or decrease)Explanation / Answer
BUY
As when the Fed buys by paying nominal money, the money supply in the economy rises.
SELL
When the Fed sells against nominal money, people purchases and thus money supply decreases.
decrease
when the discount rate is decreased, the credit creation capacity of the banks increases thereby increasing the money supply in the economy.
Increase,
when the discount rate is increased, the credit creation capacity of the banks decreases thereby decreasing the money supply in the economy.
Decrease,
when the reserve ratio is decreased, the credit creation capacity of the banks increases thereby increasing the money supply in the economy.
Increase,
when the reserve ratio is increased, the credit creation capacity of the banks decreases thereby decreasing the money supply in the economy.
Increase,
when the interest paid on reserves is increased, the credit creation capacity of the banks increases thereby increasing the money supply in the economy.
Decrease,
when the interest paid on reserves is decreased, the credit creation capacity of the banks decreases thereby decreasing the money supply in the economy.
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total available to Fed to increase the money supply Fed should to decrease the money supply Fed should Open market OperationsBUY
As when the Fed buys by paying nominal money, the money supply in the economy rises.
SELL
When the Fed sells against nominal money, people purchases and thus money supply decreases.
Discount Ratedecrease
when the discount rate is decreased, the credit creation capacity of the banks increases thereby increasing the money supply in the economy.
Increase,
when the discount rate is increased, the credit creation capacity of the banks decreases thereby decreasing the money supply in the economy.
Reserve RatioDecrease,
when the reserve ratio is decreased, the credit creation capacity of the banks increases thereby increasing the money supply in the economy.
Increase,
when the reserve ratio is increased, the credit creation capacity of the banks decreases thereby decreasing the money supply in the economy.
Interest paid on reservesIncrease,
when the interest paid on reserves is increased, the credit creation capacity of the banks increases thereby increasing the money supply in the economy.
Decrease,
when the interest paid on reserves is decreased, the credit creation capacity of the banks decreases thereby decreasing the money supply in the economy.
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