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Macroeconomic Impact on
Business Operations
To control the supply of money in the United States the Federal Reserve uses three tools. The tools The Fed implements are Open Market Operations, The Reserve Ratio, and the Discount Rate. The three tools of monetary control each have distinct uses. This paper will define what the tools are, discuss how the three tools influence the money supply and macroeconomic factors, and a recommendation for monetary policy combinations that best achieve a balance between economic growth, low inflation, and a reasonable rate of unemployment.
Open Market Operations is defined as "The Fed's open-market operations consist of the buying of government bonds from, or the selling of government bonds to, commercial banks and the general public. Open-market operations are the Fed's most important instrument for influencing the money supply". (McConnell, Brue 2004.) Purchases and sales of U.S. Treasury and federal agency securities are the Federal Reserve's principal tool for implementing monetary policy. An example of this would be when the Federal Reserve Bank procures securities on the open market, it increases the reserves of commercial banking making it possible for the banks to expand their loans and investments, thus increasing the flow of federal reserve notes. When the Federal Reserves buy six million dollars worth of bonds from commercial banks the reserves for the commercial banks swell to that amount.
Reserve Ratio is defined as "The ratio of the required reserves the commercial bank must keep to the bank's own outstanding checkable-deposit liabilities". (McConnell, Brue 2004.) The reserve ratio is another tool used in monetary policy impacting the cou ...