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As you all know, the Federal Reserve is responsible for maintaining the country’s Monetary Policy.💰 

  • In supplementing the country’s fiscal policies, The Federal Reserve pursues either a plan of expansionary monetary policy or a plan of contractionary monetary policy. 

Tools

  • The Federal Reserve uses three main tools to create monetary policy: the discount rate, the federal funds rate, and the purchase/sale of bonds

How tools are used

  • When the Federal Reserve plans to implement a contractionary monetary policy, it will either increase the discount rate, increase the federal funds rate, or sell bonds💱
  • When the Federal Reserve plans to implement an expansionary monetary policy, it will either decrease the discount rate, decrease the federal funds rate, or buy bonds💱

Methodology

  • Increasing the discount rate, increasing the federal funds rate, and selling bonds allow the federal government to reduce the supply of money in the macroeconomy
  • The increased interest rates result in people borrowing less money, while the selling of treasury bonds transfers money from the people to the government
  • Decreasing the discount rate, decreasing the federal funds rate, and buying bonds allow the federal government to increase the supply of money in the macroeconomy
  • The decreased interest rates result in people borrowing more money, while the buying of treasury bonds transfers money from the government to the people
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