To discuss the three different tools that Fed can use to control the interest rate through changing the money supply.

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Chapter 25, Problem 6.5P

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To discuss the three different tools that Fed can use to control the interest rate through changing the money supply.

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According to an article in the Wall Street Journal in June 2016, Congressman Jeb Hensarling of Texas, chair of the House Financial Services Committee criticized the Fed for paying banks an interest rate on their reserves that was higher than the federal funds rate. Source: Kate Davidson, open double quote“House Republicans Grill Janet Yellen on Fed Operations,close double quote” Wall Street Journal, June 22, 2016. Why isn't the Fed able to set the interest rate it pays banks on reserves equal to the actual federal funds rate? A. Only banks can borrow and lend in the federal funds market. B. Financial institutions such as Fannie Mae can borrow and lend in the federal funds market, but are not eligible to receive interest on their deposits with the Fed. C. There is not enough competition among banks to drive the federal funds rate up to the interest rate the Fed pays on reserves. D. Competition among banks to obtain funds on the federal funds market drives the interest…

What two monetary policy tools does the Fed now rely on in changing its target for the federal funds rate? Briefly describe how the Fed can use these tools to raise its target for the federal fund rate. (Choose two from the list below) 1. Increasing the interest rate it pays on banks' reserves 2. Rasing the interest rate it pays on overnight reverse repurchase facilities 3. Using a policy of quantative easing to sell long term securities 4. Decreasing the interest rate it pays on banks' reserves 5. Lowering the interest rate it pays on overnight reverse repurchase facilities

What two monetary policy tools does the Fed now rely on in changing its target for the federal funds rate? Briefly describe how the Fed can use these tools to lower its target for the federal funds rate. (Choose two from the list below.) If the Fed uses these two new policy tools to manage the federal funds rate, it can lower its target rate by A. using a policy of quantitative easing to buy long-term securities B. lowering the interest rate it pays on overnight reverse repurchase facilities C. increasing the interest rate it pays on banks' excess reserves D. raising the interest rate it pays on overnight reverse repurchase facilities E. decreasing the interest rate it pays on banks' excess reserves