What are tools a central bank can use in an ample reserve economy? (4.6)
A. Discount Rate
B. Open Market Operations
C. Required Reserve Ratio
D. Quantitative Easing
E. A, B, and C are correct
Answer (2)
In an ample reserve economy, central banks utilize tools like the discount rate, open market operations, and the required reserve ratio to manage monetary policy. These tools help to influence borrowing costs, liquidity, and the overall money supply in the economy. Therefore, the correct answer is E, which states that A, B, and C are correct.
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Central banks play a crucial role in managing a country's economy by controlling the money supply and interest rates. In an ample reserve economy, where banks hold more reserves than required, central banks have several tools at their disposal to influence economic activity. Here are the key tools that a central bank can use:
Discount Rate (A): The discount rate is the interest rate charged by central banks on loans they provide to commercial banks. Lowering the discount rate makes borrowing cheaper for banks, encouraging them to lend more to businesses and consumers. Conversely, increasing the discount rate makes borrowing more expensive, which can help slow down inflation by reducing spending.
Open Market Operations (B): Open market operations involve the buying and selling of government securities in the open market. When the central bank buys securities, it injects money into the economy, increasing reserves and encouraging banks to lend more. Selling securities has the opposite effect, decreasing reserves and reducing lending.
Required Reserve Ratio (C): The required reserve ratio is the fraction of deposits that banks must hold as reserves and not lend out. Reducing this ratio increases the amount of funds that banks have available to lend, which can boost economic activity. Raising the ratio contracts the money supply by requiring banks to hold more in reserves.
Quantitative Easing (D): Quantitative easing (QE) is a form of monetary policy where the central bank purchases longer-term securities from the open market to increase the money supply and encourage lending and investment. It is typically used when traditional monetary policy tools have become ineffective.
Based on this understanding, the correct multiple-choice option that describes tools used by a central bank in an ample reserve economy is (E) A, B, and C are correct. These tools include the discount rate, open market operations, and the required reserve ratio, which are standard methods used by central banks to influence financial conditions and stabilize the economy.
