In a limited reserve monetary system, the Fed wants to increase the money supply (which is currently $5,000) by $250. The money multiplier is 2, and people hold no cash. For each 1 percentage point the discount rate falls, banks borrow an additional $10.
Explain how the Fed can achieve its goals using the following tools:
a. Change the reserve requirement.
b. Change the discount rate.
c. Use open market operations.