ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Targeting Interest Rates versus Targeting the Money Supply The Fed’s control over monetary policy stems from its exclusive ability to alter the money supply and credit conditions more broadly. The Fed directly controls the monetary base, which is made up of currency (Federal Reserve notes) and bank reserves.

Detailed explanation-2: -The two tools used to keep the FFR in the target rate range are: Interest on reserve balances (IORB): The Fed pays interest on the reserves that banks keep with it. Overnight reverse repurchases (ON RRP): The Fed sells securities to banks that aren’t eligible for interest on reserve balances.

Detailed explanation-3: -Monetary policy is a set of actions to control a nation’s overall money supply and achieve economic growth. Monetary policy strategies include revising interest rates and changing bank reserve requirements.

Detailed explanation-4: -Answer and Explanation: The tool that the Federal Reserve tends to use most to control the money supply is the interest rates tool. The Federal Reserve prefers this tool rather than the other tools because of its ability to control the amount borrowed from banks easily.