What are the four tools of monetary policy? (Don\'t add explanation to four tool

Question

What are the four tools of monetary policy? (Don't add explanation to four tools, just answer the below parts!)

a). Tool one (150 words): How does this tool correct any deviation in the business cycle concerning unemployment and inflation?

b). Tool two (150 words): How does this tool balance out the lending and borrowing in the financial market?

c). Tool three (150 words): How does this tool help banking systems to borrow from one another and the Federal Reserve.

d). Tool four (150 words): How does this tool facilitate an investment activities:

(i). During recession

(ii). During expansion

Note: Make sure to leave 1 blank line between each answer.

Explanation / Answer

Four tools of monetary policy are the Discount rate, open market operation, reserve requirement, and the federal fund rate.

a) Discount rate helps correct the business cycle. The discount rate is the rate at which the federal bank lend funds to the other banks. If the discount rate is high the banks will borrow less and there will be less fluidity in the market. If the discount rate is low the banks will borrow more and increase the liquidity in the market. At high liquidity, the inflation will be high and the unemployment will be low. At low liquidity, inflation will be low and unemployment will be high.

b) Reserve requirement helps manage the excess funds in the banks and lending. At high reserve ratio banks will have fewer funds to lend and at low reserve ratio banks can lend more.

c) Federal fund rate is the rate at which the banks lend overnight to other banks or financial companies. Higher the rate lower the fund and vice versa. IF the rates are low the banks will borrow more from each other and if the federal fund rates are high banks can borrow more form each other.

d) Open market operation. The open market operation is buying and selling of bonds in the open market.

IN case of recession, the bank will buy bonds and increase the liquidity in the market increasing the demand.

In case of expansion, the banks will sell bonds and absorb the excess liquidity in the market. It will decrease the inflation and increase the interest rate.  

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