What are the three main weapons with which the Fed can control credit expansion?

Question

What are the three main weapons with which the Fed can control credit expansion? For each, what action does the Fed take to contract the money supply? How powerful are they in controlling interest rates, output, employment and prices ?
What are the three main weapons with which the Fed can control credit expansion? For each, what action does the Fed take to contract the money supply? How powerful are they in controlling interest rates, output, employment and prices ? What are the three main weapons with which the Fed can control credit expansion? For each, what action does the Fed take to contract the money supply? How powerful are they in controlling interest rates, output, employment and prices ?

Explanation / Answer

There are three main weapons that the Fed uses to control credit
A change in reserve requirements-The reserve ratio is the percentage of reserves a bank is required to hold against deposits.A decrease in the ratio will allow the bank to lend more, thereby increasing the supply of money and vice-versa.

A change in the discount rate -The discount rate is the interest rate that the central bank charges commercial banks that need to borrow additional reserves. It is an administered interest rate set by the Fed.If the Fed wants to give banks more reserves, it can reduce the interest rate that it charges, thereby tempting banks to borrow more.Alternatively, it can soak up reserves by raising its rate and persuading the banks to reduce borrowing.

Open-market operations-Open-market operations consist of the buying and selling of government securities by the Fed. If the Fed buys back issued securities (such as Treasury bills) from large banks and securities dealers, it increases the money supply in the hands of the public. Conversely, the money supply decreases when the Fed sells a security.

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