Which of the following has become the principal tool of central bank monetary policy today quizlet?

In the United States a commercial bank qualifies as a "bank" under federal law if it offers:

A) Consumer installment loans, CDs
B) Savings deposits, commercial loans
C) Checking accounts, commercial loans
D) Security investments, inventory loans to business customers
E) Commercial deposit accounts, consumer savings plans

The Federal Reserve implements monetary policy using three major tools. Open market operations--purchases and sales of U.S. Treasury and federal agency securities--are the Federal Reserve's principal tool for implementing monetary policy. The short-term objective for open market operations is specified by the Federal Open Market Committee (FOMC). This objective can be a desired quantity of reserves or a desired price (the federal funds rate). The federal funds rate is the interest rate at which depository institutions lend balances at the Federal Reserve to other depository institutions overnight.

The second major monetary policy implementation tool is the discount rate. The discount rate--the interest rate charged to commercial banks and other depository institutions on loans they receive from their regional Federal Reserve Bank's lending facility--is established by the Board of Directors of the Federal Reserve Banks subject to review and determination by the Board of Governors. The Federal Reserve Banks offer three discount window programs to depository institutions: primary credit, secondary credit, and seasonal credit, each with its own interest rate. Further information on the discount window, including discount rates, is available on the Federal Reserve's discount window Web site.

The third major monetary policy implementation tool is reserve requirements. Reserve requirements are the amount of funds that a depository institution must hold in reserve against specified deposit liabilities. Within limits specified by law, the Board of Governors has sole authority over changes in reserve requirements. Reserve requirements are imposed solely for monetary policy purposes. Depository institutions must hold reserves in the form of vault cash or as deposits with Federal Reserve Banks.

The Federal Reserve Banks pay interest on required reserve balances--balances held at Reserve Banks to satisfy reserve requirements--and on excess balances-- balances held in excess of required reserve balances and contractual clearing balances. The interest rate paid on required reserve balances is determined by the Board and is intended to eliminate effectively the implicit tax that reserve requirements used to impose on depository institutions. The interest rate paid on excess balances is also determined by the Board and gives the Federal Reserve an additional tool for the conduct of monetary policy.

Using these tools, the Federal Reserve influences the demand for and supply of balances that depository institutions hold on deposit at Federal Reserve Banks (the key component of reserves) and thus the federal funds rate- -the interest rate charged by one depository institution on an overnight sale of balances at the Federal Reserve to another depository institution. Changes in the federal funds rate trigger a chain of events that affect other short-term interest rates, foreign exchange rates, long- term interest rates, the amount of money and credit in the economy, and, ultimately, a range of economic variables, including employment, output, and the prices of goods and services.

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