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Which Monetary Tools Available To The Federal Reserve Is Most Often Used? Why?

730 Words3 Pages

Which of the monetary tools available to the Federal Reserve is most often used? Why? Amongst the four monetary tools available to the Federal Reserve which are the discount rate, reserve requirements, open market operations, and interest on reserves, the open market operations has been a more reliable tool which is the buying and selling of U.S government securities. The term open market itself speaks everything. It means the Fed doesn't decide on its own which security dealers it will do business with on a particular day. The choice emerges from an "open market" in which the various securities compete on the price (Federal Reserve Education. Org). For …show more content…

Through the open market operation the Fed can try t o promote and/or achieve aggregate demand growth which is the sum of private consumption, investments, government spending and imports by purchasing government securities on the open market. This will definitely yield specific economics results which will include an increase in the reserves of commercial banks, an increase in the price of government securities and an effective decrease in government securities' interest rates and the overall interest rates. The move can effectively promote business investments. Whenever banks increases the reserves, they increase their loans and investments. The sell of those government securities will definitely do the opposite. An increase in the money supply decreases interest rates and it works as a tool to promote and encourage lending and investment in the U.S. economy which will resulting in a reduction in the unemployment rate. The move will as well improve credit availability since commercial banks will have more money to lend and new investments will be coming into the economy. Under such economic developments businesses can expand

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