Author Question: What is the principle monetary policy tool used by the Fed. Why? What will be an ideal ... (Read 71 times)

hubes95 · **on:** Jun 29, 2018

What is the principle monetary policy tool used by the Fed. Why?

What will be an ideal response?

Question 2

The tax multiplier is smaller in absolute value than the government purchases multiplier because some portion of the

A) decrease in taxes will be saved by households and not spent, and some portion will be spent on imported goods.
B) increase in government purchases will be saved by households and not spent, and some portion will be spent on imported goods.
C) decrease in taxes will be saved by households and not spent, and some portion will be spent on consumer durable goods.
D) increase in government purchases will be saved by households and not spent, and some portion will be spent on consumer durable goods.

skipfourms123 · **Reply #1 on:** Jun 29, 2018

Answer to Question 1

The tool that the Fed primarily uses is open market operations. There are three reasons. First, because the Fed is the party that initiates the open market operations, it completely controls the volume. Second it can make the volume large or small, depending on how many U.S. Treasury securities it decides to buy or sell. Finally, it can implement this policy tool quickly. It does not have to change regulations and the administrative machinery is in place for it to make changes quickly.

Answer to Question 2

A