1. There are several tools the Fed uses to implement monetary policy.
A) Briefly describe these tools.
1) Reserve Requirement-requires banks to hold a fraction of deposits.
2) Discount Rate-the amount the Feds charge banks that borrow from them.
3) Open Market Operations- the buying and selling of U.S. government bonds.
B) describe how the Fed would use each tool in order to increase the money supply.
2. Suppose the banking system has vault cash of $1,000 deposits at the Fed of $2,000, and demand deposits of $10,000.
A) If the reserve requirement is 20 percent, what is the maximum potential increase in the money supply given the banks' reserve position?
B) If the Fed now purchases $500 worth of government bonds from private bond dealers, what are excess reserves of the banking systems? Assume that the bond dealers deposit the $500 in demand deposits. How much can the banking system increase the money supply given the new reserve position?
3. Briefly describe the process of setting the federal budget in the United States. What is the time lag between the start of the process and the point at which the money is actually spent?