Question

Question 1 -- / 10 1) The Federal Reserve Board has a variety of monetary tools available to it to influence the economy. Identify and define the most commonly used mechanism of monetary policy and one additional tool of your choice. Discuss the effect of each of these tools on the relevant parties.

Answer 1

Answer 1

The Fed can use four tools to achieve its monetary policy goals: the discount rate, reserve requirements, open market operations, and interest on reserves

The most common tool used by Federal Reserve Board to influence the Monetary Policy is: Interest on Reserves

Effect of changing Interest On Reserves

If the Fed wanted to create a greater incentive for banks to lend their excess reserves, it could lower the interest rate it pays on excess reserves. Banks are more likely to lend money rather than hold it in reserve (so they can make more money). This is called as expansionary policy.

Efeect of Open Market Operations

If Fed sells off the government securities that it has in its reserves, it is said to be taking a contractionary policy. This is because public would give away their money to the Federal Reserve in order to purchase those Government Securities, hence, they would not be left with a lot of money to spend.

Answer 2

The balance of payments (BOP) is a statement of all transactions made between entities in one country and the rest of the world over a defined period of time, such as a quarter or a year.

A country's balance of payments is said to be in surplus (equivalently, the balance of payments is positive) by a specific amount if sources of funds (such as export goods sold and bonds sold) exceed uses of funds (such as paying for imported goods

Negative balance of payments means that for a nation, the value of import is much more than the value of export i.e. the country spends much more on buying imported goods from other nations than selling its own products to the other countries.

This leads to a loss of the economy and expenditure of the economic reserves, which is really detrimental for a nation.