Of the three primary tools the federal reserve uses to conduct monetary policy, the tool used most often is the open market operation.
Monetary policy are policies taken by the Federal reserve to affect the level of aggregate demand in the economy.
Tools of monetary policy:
1. Open market operations : It is when the Feds either sell bonds to the public or buys bonds from the public. When the Fed buys bonds, it is known as contractionary policy. When it buys bonds, it is known as an expansionary policy.
2. Reserve Requirement : Reserves are the proportion of deposits required by the central bank that banks keep. If reserve requirement is increased, ,money supply in the economy decreases and if it is decreased, money supply increases.
3.Discount rate : this is the rate at which the central bank lends to commercial banks. An increase in discount rate is a contractionary policy while an decrease in discount rate is an expansionary policy .
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