Question

1. What is the Federal Reserve System, and what is its purpose?

2. List and explain the primary tools does the Fed have for conducting monetary policy.

Answer 1

Answer 1 :

Federal Reserve System :

It is defined as the ​​​​​​independent central bank founded by congress to provide the nation with a safer, more flexible, more stable monetary and financial system.

The Federal Reserve System is made up of the Board of Governors, twelve district reserve banks, member banks, and the Federal Open Market Committee

Purpose of Federal Reserve System :

It works to strengthen and stabilize the nations monetary system.

It provides financial services to the government, regulates financial institutions, maintains the payment system, enforces consumer protection laws, and conducts monetary policy.

Answer 2 :-

Three tools that Fed has to carry out its monetary policy goals.

(1). Discount Rate :-

The minimum interest rate set by the Federal Reserve for lending to other banks.Increase in discount rate will make it more expensive for banks to borrow and decrease the money supply. Decrease in discount rate will make it cheaper for commercial banks to borrow money and increase money supply.

(2). Reserve Requirements :-

Sets the minimum fraction of customers deposits and notes that each commercial bank most hold as reserves.Increase in reserve requirements reduced the volume of deposits that can be supported by a given level of resources. Whereas decrease in the reserve requirements leaves depositories with excess reserves which can induce the expansion of bank credit.

(3). Open market Operations :-

The process of which the Federal Open Markets Committee buys and sells securities to set the money supply. It is most frequently used, affects the federal funds rate.

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