Question

What are the four principal tools of monetary policy? Explain how they can be used.

Answer 1

Answer-The four principal tools of monetary policy are-

1.The discount rate.

2.Reserve requirements.

3.Open market operations.

4.Interest on reserves.

They can be used as-

1. The discount rate-It is type of tool in monetary policy that is used as the interest rate which reserves banks charge commercial banks for short term loans.

2. Reserve requirements-It is a type of tool in monetary policy which is used as the amount of funds that a bank keep with them as a reserve to make sure that it is able to meet liabilities in case of sudden or immediate withdrawals.

3. Open market operations-An open market operation is a type of monetary policy tool and it is classified as an activity or a function by a central bank or reserve bank to give liquidity in its currency to a bank or a group of banks.

4.Interest on reserves-It is a type of monetary policy tool which is used as the rate of interest at which the federal reserves banks pay interest on reserve balances.