Asked by Mario Alberto on Jun 12, 2024
Verified
The most powerful (but seldom used) tool at the Federal Reserve's disposal is
A) the ability to set reserve requirements.
B) the discount rate.
C) open market operations.
D) margin requirements on stock purchases.
Reserve Requirements
Reserve Requirements are regulations set by central banks determining the minimum amount of reserves that banks must hold against deposits, used as a tool of monetary policy.
Discount Rate
The interest rate charged to commercial banks and other financial institutions for loans received from the central bank's discount window.
Open Market Operations
Activities conducted by central banks to buy or sell government securities in the open market to control the money supply and interest rates.
- Acquire insight into the different mechanisms of monetary policy, encompassing open market operations, the discount rate, and reserve requirements.
Verified Answer
RG
Rosalinda GonzalesJun 17, 2024
Final Answer :
A
Explanation :
While all of the options listed are tools used by the Federal Reserve, setting reserve requirements is the most powerful and can have the biggest impact on the money supply. Reserve requirements determine the amount of money that banks must hold in reserve, which affects how much money can be loaned out and circulated in the economy. Changing reserve requirements can have a ripple effect throughout the economy and can either encourage or slow down borrowing and spending. However, reserve requirements are seldom used because they are seen as a drastic measure and can have unintended consequences.
Learning Objectives
- Acquire insight into the different mechanisms of monetary policy, encompassing open market operations, the discount rate, and reserve requirements.