1. Mention three principal tools of monetary policy. Explain how they can be used. (1) O 0 1 that the Federal Reserve System It is the purchases and sales of U.S. government s undertakes in order to influence i rates and the money supply. Remember from Chapter 13 that the U.S. government has trillions of dollars' worth of government bonds (securities) in existence, i.e., held as debt. We know that this tool has been used for money supply. When the Fed (purchases, sells) securities that "soak" up money, the money supply decreases. Likewise, the Fed's ( purchases, sales) of the securities can be associated with "pump or push," the money supply increases. (2) The three a 1) The interest rate on r - 2) The overnight r b depository institutions can loan money to the Fed; t loan money to the Fed; and - 3) The d (3) F rates. (IORB) at which banks and other rate (ON RRP) at which non-depository financial firms can rate at which banks and other depository institutions can (borrow, lend) money from (to) the Fed. Out