The Federal Reserve's primary tool for changing the money supply isthe discount rate. In order to increase the number of dollars in the U. S. economy (the money supply), the Federal Reserve will government bonds.

Question

Business

Hector Wagner

2 May, 01:39

The Federal Reserve's primary tool for changing the money supply isthe discount rate. In order to increase the number of dollars in the U. S. economy (the money supply), the Federal Reserve will government bonds.

+3

Answers (1)

Know the Answer?

Nancy Huffman · Answer 1

No, it's not the discount rate but the Open Market Operations.

Explanation:

The Federal Reserve has three main instruments for influencing money supply: open market operations, the discount rate and commercial banks' reserve requirements.

1. Open market operations has to do with the buying and selling of government bonds, treasury bills, financial instruments and securities. This is the most frequently used tool by the Fed because if it wants to increase supply of money, it will simply buy bonds and pay money to bond-holders, hence increasing the amount of money in circulation and vice versa.

2. The discount rate is the second most frequently used. It is simply the interest rate which the Fed charges to commercial banks on the short run. This changes from time to time.

3. Reserve requirements are the amounts of deposits that commercial banks must keep and not pay out into circulation. It remains as a deposit with the Federal Reserve Bank.