identify and describe the following tools of monetary policy
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identify and describe the following tools of monetary policy
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Answer:
Reserve Requirement
The money that banks must keep on hand overnight is referred to as the reserve requirement. They have the option of keeping the reserve with the central bank or in their own safes. Banks can lend more of their deposits when the reserve requirement is low. Because it generates credit, it is expansionary.
Open Market Operations
The money that banks must keep on hand overnight is referred to as the reserve requirement. They have the option of keeping the reserve with the central bank or in their own safes. Banks can lend more of their deposits when the reserve requirement is low. Because it generates credit, it is expansionary.
Discount Rate
The cost that central banks charge their member banks to borrow money from them at their discount window is known as the discount rate.8 Because it is higher than the federal funds rate, banks only use this option if they are unable to borrow money from other banks.
Interest Rate on Excess Reserves
Interest is paid on any surplus reserves held by banks by the Federal Reserve, the Bank of England, and the European Central Bank. The Fed must cut the rate it pays on excess reserves if it wants banks to extend more credit. It raises the rate if it wants banks to lend less.
The fed funds rate objective is also supported by interest on reserves. Banks will only lend federal funds at the rate they are paid by the Federal Reserve for those reserves.
Explanation: