Which Of The Monetary Tools For The Federal Reserve Is Most Often Used? Why?
The monetary tools often used by Federal Reserve are open market whose operations are flexible. Open markets is a trade that involves buying and selling of United State treasury and federal agency securities in the open market and consists members of the Board of Governors of the Federal Reserve System and 5 Reserve Bank presidents. The FOMC holds 8 regularly scheduled meetings during the year and other meetings as needed. Therefore open markets estimates the demand for reserves at a target rate every morning, then supplies that quantity for the day, which keeps the daily supply curve for reserves vertical until it reaches the discount rate, then it becomes horizontal, because then the banks will simply borrow from the Fed rather than pay higher rates from each other, (This matter. n.d)
The Federal Reserve deals with primary dealers who they have a relationship with on an open market such as government securities dealer. Thus primary dealers have accounts at clearing banks, which are depository institutions. Federal reserve sends and receives funds from the dealer 's account at it’s clearing bank, this action adds or drains reserves to the banking system, (Federal Reserve Education. n.d).
Secondly, Federal Reserve uses another monetary policy called discount window lending to depository institutions. The Board of Governors approves the setting of rates by Reserve Banks. Therefore, discount…