Article: Federal Reserve statement - lowering federal funds rate to 0 to .25%
Define the term monetary policy tools .
Monetary Policy tools are mechanisms used to institute alterations in money supply and the frequency in which the money supply varies. The changes comprise of strategies that can be considered expansionary or contractionary (Arnold, 2019). The tools include market operations, reserve requirements, and discount rates.
Explain how each monetary policy tool is used.
Foremost, Open market operations may be used to alter the money supply whereby the Federal bank acquires or retails government securities from a banking institution to strengthen or reduce the banking reserves. This consecutively adds or decreases the money supply after money is appropriately distributed from excess reserves.
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Secondly, the reserve requirements ratio is the volume of money banking institutions are compelled to maintain in reserves which is a proportion of checkable payments. By altering the required reserve ratio, the reserve surplus sums may vary, making additional or less capital accessible for loans that increase or decrease the supply of money.
The discount loan rate regulates the discount rates used by banks to lend money from the federal bank. According to Timmons and Zieminski (2020), the Federal Bank may decrease the discount rate below the federal funds rate. Therefore, banks may appeal more to lending money from the Fed than other banks, which will enlarge the money supply by raising the rates.
Provide an example of a real-life application in which the Federal Reserve Banking System would use contractionary monetary policy over expansionary monetary policy.
An instance of a real-life application entails mitigating inflation. A rise in inflation is likely to increase production and raise prices, therefore creating a state whereby inflation levels rise steeply. According to Amadeo (2019), contractionary monetary policy may be applied by compounding the rates. Therefore, reducing money supply which in turn decreases expenditure, eventually mitigating inflation.
Discuss which monetary policy is used most often and why .
Open market operations are considered the most used monetary policy. It is rather flexible as most dealers in securities compete based on the price compared to the federal bank making its decisions. This is embarked on a daily basis to prevent other industry players from leading the federal funds' rates further from the federal target rates.
References
Timmons, H. & Zieminski, N. (2020, March 15). Federal Reserve statement - lowering federal funds rate to 0 to .25%. [Website Blog Post]. Retrieved from https://www.reuters.com/article/ushealth- coronavirus-central-banks-fed/federal-reserve-statement-lowering-federal-funds-rate-to-0-to-25-idUSKBN2121A0
Amadeo, K. (2019, November 08). Contractionary monetary policy with examples. the balance. Retrieved from https://www.thebalance.com/contractionary-monetary-policy-definitionexamples- 3305829
Arnold, R. (2019). Economics (13th ed.). Boston, MA: Cengage Learning.
