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ap macro 6.2.4 practice

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AP Macroeconomics Assignment: Apply Concepts of Monetary Policy Page 1 of 5 User Name:_______________ Instructor: _________________ Date:__________ (print clearly) 1. The two tasks with which the Fed is charged are promoting the health of the banking industry and promoting the overall health of the economy. Various regulations allow the Fed to achieve the first of these tasks. Three tools allow it to achieve the second. A. List and briefly describe the three policy tools the Fed can use to promote the overall health of the economy. (3 points) The three tools that the Fed can use to promote overall health of the economy is the reserve ratio, which is the percentage of bank deposits the banks must hold in reserve, the discount rate, which is the interest rate the Federal Reserve charges banks for overnight loans, and open market operations, which is the buying and selling of t-bonds to increase or decrease the money supply. B. How should the Fed adjust each of the three policy tools if it wants to conduct expansionary monetary policy? Contractionary monetary policy? (6 points) If the Fed wants conduct an expansionary monetary policy, they should decrease the required reserve ratio, decrease the discount rate, and buy t-bonds. If they want to conduct a contractionary monetary policy, they should increase the required reserve ratio, increase the discount rate, and sell t-bonds. The required reserve ratio is rarely used to conduct expansionary monetary policy because the ra ...
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