Author Question: How effective is discount policy as compared to open market operations in managing the money supply? ... (Read 77 times)

mikaylakyoung · **on:** Jun 29, 2018

How effective is discount policy as compared to open market operations in managing the money supply? Explain how The Federal Reserve uses discount policy today.

What will be an ideal response?

Question 2

What does it mean to say that we are running out of cheap oil? What does this imply for the price of oil in the future?

What will be an ideal response?

AaaA · **Reply #1 on:** Jun 29, 2018

Answer to Question 1

The effectiveness of discount policy in changing the money supply depends upon banks' willingness to borrow reserves. The Fed may lower the discount rate of interest, encouraging bankers to borrow reserves and increase loans. But bankers are not required to increase their borrowing. In contrast, an open market purchase of securities will increase reserves in the banking system and encourage lending. The Fed prefers to limit the use of discount policy to help banks that are temporarily in need of reserves. That is, the Fed uses the policy to serve as a lender of last resort for banks. It did so after the stock market crash in 1987 and after the terrorist attacks on September 11, 2001.

Answer to Question 2

To say that we are running out of cheap oil means that much of the oil that is needed to meet the demand for oil in the future is relatively expensive to find and extract. This suggests that the price of oil will increase in the future. There is an enormous amount of oil under the surface of the earth, but for firms to profitably drill for oil, the price of oil needs to be high enough to pay for the costs of drilling.