Written Assignment Unit 5 PDF

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Which of the monetary tools available to the Federal Reserve is most often used? Why? Introduction The Federal Reserve which is also known as Fed is an American Central Bank System wish was established around 1914 with its Headquarters located in Washington Dc. Its main role was to ensure that the monetary policy is protected from political pressure and that there is price stability. The Fed under some degree of the government control that is responsible for influencing the money supply, interest rates, inflation, and other macroeconomic outcomes like output and employment (Wright & Quadrini, 2009). This essay will describe some of the activities that the Fed does to achieve stability in the United States. The Fed uses four tools so as to achieve its monetary policy goals. These tools include the reserve requirements, open market operations, discount rate and interest on its reserve. The most used monetary tool by the Federal Reserve is the open market operations that are conducted, usually by the FRBNY. According to both Federal Reserve Education and the Federal Reserve Bank of Dallas, this is one of the most used monetary tools. The fed buys government bonds using the new money. This gives the Federal Reserve control over the size of the money supply. Once the Fed buys these government securities or bonds in the open market, immediately the money supply goes up, which leads to a multiplied increase in money throughout the economy, as banks lend out their excess reserves (EXPERT ANSWERS, 2018).

Describe how expansionary activities conducted by the Federal Reserve impact credit availability, the money supply, interest rates, and security prices. According to Amadeo (2018) an expansionary policy is a macroeconomic policy which aims at stimulating the economy. An expansionary policy increases the money supply in the economy and lowers the interest rates boosting the growth and development of a country. The increase in money supply will lead to consumers spending more and increasing a rise in the price of securities. Expansionary policy also causes rise in stocks and lower rates prompt companies to buy shares or issue dividends. 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 sheet. The Federal Reserve is the only bank that is responsible for creating or destroying money. Money can be created or destroyed by changing information on the Fed’s balance sheet. The supply of money is done by the Fed in order to achieve specific objectives such as low inflation, maximum growth or high unemployment. A Fed’s balance sheet, like most banks, is divided into assets, liabilities and equity in its simplest form. If the Fed purchases $10 billion worth of foreign currency it means it will increase its assets by the said amount and the same amount will be shown own liabilities because deposit accounts are liabilities. The purchase of $10 billion worth of foreign currency will also cause an increase in the Fed’s capital.

Fed’s Balance Sheet Assets

liability

Foreign reserves $10 billion

Deposit accounts $10 billion

Total $10 billion

Total $10 billion

The Federal Reserve Bank Reference Amadeo, K. (2018). Expansionary Monetary Policy. Retrieved from: https://www.thebalance.com/expansionary-monetary-policy-definition-purposetools3305837&hl=en-ZA EXPERT ANSWERS, (2018). What are the three main tools that are used in monetary policy? Retrieved from https://www.enotes.com/homework-help/define-me-monetarypolicy-three-maintools-that-456912 Wright, R. E. & Quadrini, V. (2009). Money and Banking. Saylor Foundation. Retrieved from: https://www.saylor.org/site/textbooks/Money %20and20%Banking.pdf...