Week 12 Discussion.docx - The three traditional tools that...

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The three traditional tools that are used by a central bank to affect the money supply are the ones that were listed in our book:Open-market operations is the first one. This is the most common and powerful method used to control the money supply in the economy. The Federal Open Market Committee (FOMC) makes the decisions on when to use this operation. Nonetheless, it is the one used most often. It is the most commonly used method to affect the money supply. Basically, it is when the central bank sells/buys bonds from the U.S. Treasury, which influences the level of interest rates and the quantity of bank reserves. When the bank has less for loans, there is less money, and vice versa. Therefore, the number of loans available and the money available are related.The second one is changing reserve requirements. A reserve requirement is "the percentage of eachbank’s deposits that it is legally required to hold either as cash in their vault or on deposit with the

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