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What are the three main tools the Federal Reserve (Fed) has at its disposal to carry out monetary policy? setting the discoun
The limiting of systemic risk in the economy by the Fed, creates in the banking profession. a borrowing paradox a pyramid sch
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Answer #1

Answer 1: The correct option for the three main tools of Federal Reserves are : Open market operations, setting discount rate and paying interest on reserves.

The Federal reserves can participate in open market operations in which it buys and sells bonds in the open market which can be used to control money supply. It sets the discount rate, which helps to control money supply in the country. High discount rate means low money supply and vice versa. It also pays interest on reserves which are parked by the commercial banks in the Federal reserves. If it pays high interest on reserves of the commercial banks, there will be more money supply in the economy.

Other options are wrong because:

Charging taxes, building highways comes under government's fiscal policy. Further, it cannot control money demand, it can control money supply because money is demanded by public and money is supplied by the central bank.

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