1. Which of the monetary tools available to the Federal Reserve is most often used? Why? The Central Bank of America also known as the Fed has many monetary policy tools it uses to indirectly control or influence inflation and employment. Some of the most used and well-known tools include the Fed funds rate. It affects inflation and employment indirectly, by raising or reducing interest rates mainly through open market operations. This affects the levels of investment in the economy and hence jobs that are created. The Central Bank also works to achieve economic stability by changing the quantity of money in circulation, the cost and availability of credit, and the composition of a country's national debt. The Central Bank has three instruments available to it in order to implement monetary policy and they include, the open market operations, reserve requirements, and the discount window. Open market operations ensure that the buying or selling of Government …show more content…
The Fed can change the percentage at any time and as a result can affect the money supply and credit conditions. An increase in reserve requirements would increase interest rates, as less money would available to borrowers. Altering reserve requirements is both a short and long-term corrective measure in the money supply. The discount window is an instrument where commercial banks, and other depository institutions, borrow reserves from the Fed at a discount rate. This rate is usually set below short-term market rates. This enables the institutions to vary credit conditions, thereby affecting the money supply. The major reason why these instruments are used is in an effort to affect the money supply, this monetary policy establishes inflation ranges, unemployment, interest rates, and economic