Compare the use of open-market-operations, central bank lending facilities (rediscounting), and changes in reserve requirements to control the money supply on the following criteria: flexibility, reversibility, effectiveness, and speed of implementation.Open Market Operations is the most powerful and the most flexible tool of Federal Reserve used to control money supply. It enables the central the Central Bank to adjust the level of reserve balances in the financial market in order to offset seasonal, cyclical or permanent shifts in reserve balances’ supply and affecting the short-term interest rates (Mishkin, 2007). The Open Market Operations is also the most effective tool because it influences the level of reserve balances directly. OMO is easily reversible because a temporary purchase in open market operations can be reversed, especially if the central bank makes a mistake in conducting an OMO. If the central bank realizes that it has made too many purchases leading to a low federal funds rate, it can easily correct that by conducting new open market sales (Mishkin, 2007). OMO can also be quickly implemented because there are no administrative delays.The discount lending is not as effective as open market operations but its effectiveness depends on whether the demand curve cuts the supply curve at the in the vertical section rather than the flat section (Mishkin, 2007). It is effective because it helps in bank panic, but its effectiveness is affected by the costs involved, including helping banks with management problems. Exchange Rate Regimes: the Central Bank.
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