module 27 The Federal Reserve: Monetary Policy 267
Section 5 The Financial Sector
Tackle the Test: Free-Response Questions
- a. What are the three major tools of the Federal Reserve
System?
b. What would the Fed do with each tool to increase the money
supply? Explain for each.
Answer (9 points)
1 point:The discount rate
1 point:The reserve requirement
1 point:Open-market operations
1 point:Decrease the discount rate
1 point:A lower discount rate makes it cheaper to borrow from the Fed so the
money supply increases.
1 point:Decrease the reserve requirement
1 point:A lower reserve requirement allows banks to loan more, increasing the
money supply.
1 point:Buy U.S. Treasury bills
1 point:When the Fed buys U.S. Treasury bills, banks’ excess reserves
increase. When lent out, these excess reserves increase the money supply with
the assistance of the money multiplier.
- What are the four basic functions of the Federal Reserve
System and what part of the system is responsible for each?