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Describe How Expansionary Activities Conducted By The Federal Reserve

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1. Which of the monetary tools available to the Federal Reserve is most often used? Why?
There are three main tools the Federal Reserve uses to influence monetary policy: Setting reserve requirements, or the amount of money a bank must keep on hold to protect deposits.; Discount rate, the interest rate charged by the Federal Reserve to banks on short term loans; and Open Market Operations. This is the tool the Federal Reserve makes the most use of. This is the buying and selling of government securities or bonds. (Investopedia.com, 2003a).
When the Government sells bonds, they can control the money that is in the banking system. By controlling the money, they are also able to control the interest rate. (Investopedia.com, 2003b).
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Describe how expansionary activities conducted by the Federal Reserve impact credit availability, the money supply, interest rates, and security prices.
The Federal Reserve, which is the central bank of the United States, is an agency of the federal government and consists of twelve regional reserve banks and a board of governors located in the District of Columbia. Monetary policy is set by the Federal Open Market Committee (FOMC). The Federal Reserve was empowered with setting monetary policy under the Federal Reserve Act of 1913. (Federal reserve system, n.d.)
Expansionary policy is economic growth. The opposite of this is contractionary, or the restriction of growth. When the Federal Reserve purchases bonds, interest rates go down. The banks selling the bonds now have more money on hand, which they in turn loan out to their customers. If interest rates are lowered, businesses can expand because they are able to obtain more credit, introducing more money into the economy. As more money is injected into the economy, employment rates go up.
(Boundless, 2016).
3. Suppose the Federal Reserve purchases $10 billion worth of foreign currency in exchange for deposit accounts at the Federal Reserve. Show the changes that result from this transaction on the Fed’s balance

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