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Question: 1—2—3

Directions: For each of the following activities, indicate if it is an expansionary policy, contractionary policy or not a Fed operation.

Action Expansionary Contractionary Not a Fed Operation

The Fed increases the reserve requirement.

The Fed raises the prime rate.

The Fed lowers the target for the federal funds rate.

The Fed buys Treasury securities to influence the money supply and interest rates.

The Fed lends money to consumers.

The Fed lowers the discount rate.

Inflation, Disinflation or Deflation?

Directions: For each of the following statements, indicate if the economy is experiencing inflation, deflation or disinflation.

Action Inflation Deflation Disinflation

"Prices, on average, have risen 2 percent since this time last year."

"The inflation rate was negative for the first time in two years."

"The inflation rate has fallen from 3 percent to 1 percent."

For each of the following actions, indicate which Federal Reserve tool is being described.

Action Discount Rate Reserve Requirements Open Market Operations

The portions of deposits that banks must hold in reserve, either in their vaults or on deposit at a Reserve Bank

The interest rate Reserve Banks charge commercial banks for short-term loans

The buying and selling of U.S. government securities

Discussion Board Topic: The Fed's Tools

The Federal Reserve System has been given a dual mandate – it must pursue the economic goals of price stability and maximum employment. Explain how the Federal Reserve System might use its three tools in the following situations:

  • The economy is growing quickly, so quickly that the rate of inflation has been rising every month for a year. People are uncertain about the future.
  • The economy has been in decline and the unemployment rate is starting to rise. Economists are starting to use the "r" word – recession – in their economic forecasts.

Record your summary by clicking on the discussion board and responding to the thread titled "The Fed's Tools."


In this section we have described the roles of the Federal Reserve Banks and the Federal Open Market Committee in monetary policy. The dual mandate describes the Fed's economic goals of price stability and maximum employment. Achieving these goals requires using monetary policy to influence the money supply, interest rates and economic growth. While the monetary policy function of the Fed is the task that gets the most attention, the Federal Reserve System has many other roles that are addressed in the final section of this course.