Answer to Question #130356 in Macroeconomics for Isaac

Question

How can monetary policy be used to achieve price stability

Answer 1

1. OPEN MARKET OPERATIONS

In open-market operations, the Federal Reserve buys or sells government securities on the open market to change the rate of growth in the country's money supply.

If the government wants to slow down the rate prices are increasing, it will decrease the supply of money in the economy by selling government securities. When a government sells securities (such as Treasury bonds), it is taking money out of the economy and replacing it with government securities. If there is less money in the economy, interest rates will tend to increase, as borrowers have to compete for loanable funds. Some borrowers will decide not to borrow money if interest rates hit a certain level, which results in a decrease in demand. As demand decreases, sellers will produce less and will not increase prices as they attempt to induce customers to buy their products. Eventually the supply of money will equal the demand for it and prices will stabilize.

(2) DISCOUNT RATE INTEREST

. As the supply of money goes down, interest rates will go up; and as the supply of money goes up, interest rates will go down. In this manner, the Federal Reserve is able to indirectly affect interest rates. However, the Federal Reserve does have a more direct, albeit less effective, means to affect interest rates that can also affect the price level.

(3.)DISCOUNT RATE RESERVE REQUIREMENT

Increasing the reserve requirements by the commercial banks decrease the money supplied to circulation as this increases the interest rates of money loaned out hence few people would be able to borrow money. This act to lower prices of accomodities which are above normal back to normal.

Decreasing discount reserve rates is aimed at increasing the supply of money to the economy.. Hence serves to increase the price of commodities which are below normal back to the desired normal price

(4)INTEREST ON RESERVES

Increasing interest on reserves tend to decrease money in circulation hence can be used to counter inflation of products

Decreasing interest on reserves tend to increase money in circulation hence can be used to counter deflation hence achieve price stability of products

References:https://study.com/academy/lesson/reserve-requirement-open-market-operations-and-the-discount-rate.html