The main way in which the Fed's policy tools affect the monetary base is through
A)changes in the demand for or supply of reserves.
B)changes in interest rates.
C)the announcement effect.
D)their impact on the portfolio decisions of the nonbank public.

Question

Quizplus · Accepted Answer

The Fed's policy tools, such as open market operations and discount rate changes, can affect the demand for and supply of reserves, which in turn affects the monetary base. For example, if the Fed purchases government securities in open market operations, this injects reserves into the banking system and increases the monetary base. If the Fed increases the discount rate, it increases the cost of borrowing reserves from the Fed and reduces the supply of reserves in the system, which reduces the monetary base. Therefore, changes in the demand for or supply of reserves is the main way in which the Fed's policy tools affect the monetary base.

The Main Way in Which the Fed's Policy Tools Affect