Tools

The government can manipulate the economy in a couple of ways, and depending on the situation, it will use different tools from a set of monetary policy tools.

The Federal Reserve System (Fed) may want to raise or lower the interest rate. It could prevent inflation by raising the interest rate, or prevent deflation by lowering the interest rate.

This graph shows one way that the Fed could raise the interest rate.

The curved line represents banks' demand for money. The black right angle is the original supply curve, the supply of money. The height of the yellow intersection is the interest rate, where supply meets demand. 

Here, the Fed can raise the interest rate is by selling bonds (gray change). As they sell bonds, they are taking money out of the economy, and with less money going around it will be harder to get money, which is reflected by a higher interest rate.

Now look at this different potential situation, in which the demand for money is greater.

Here note that selling bonds (gray change) does not do anything to the interest rate, because the demand curve does not intersect with that part of the supply curve.

So, another tool the Fed has is raising the 'discount rate'(green change) that they offer. The discount rate, or overnight lending rate, is a special interest rate offered by the Fed, somewhat independently of what is naturally determined in the market. In the purple situation, raising the discount rate will directly raise the interest rate. But, note that in the top graph (blue situation), this tool has no effect on where supply meets demand, and so it does not affect the interest rate. This happens when the private interest rate is lower than the discount rate, so nobody cares what the discount rate is. 

Also note that the tool we used in the blue situation (selling bonds, gray change) has no effect on the purple situation's interest rate, where the interest rate is determined by the discount rate offered by the Fed. Neither buying nor selling bonds will have any immediate effect on the interest rate in the purple situation.

Okay! Well that may have been a little rough, but I really think there are some principles that we can learn from this that will make us happier people.

We need different tools to deal with our unique circumstances.

Hard work is a tool; something that helps me to find satisfaction, serve others, and clear my mind of depressing thoughts. Sometimes I just need to stop worrying and overthinking things, and act on what I know is good.  

My sister inspired me in a letter that I received while serving a mission in Guatemala; it said "Work hard, pray harder." Prayer is a wonderful tool, a gift from God. I have often found peace in kneeling and sharing my feelings with my Heavenly Father. Just as praying often leads me to get on my feet and act, working hard and serving others leads me to need help from my Heavenly Father through prayer.

There are many other tools. For example, this morning I read a written blessing that I was given to guide me several years ago. It seemed that Heavenly Father had prepared that tool to meet some specific needs.

With a unique array of tools, we are all unique children of God, and I know that he can use us as tools in his hands in unique and wonderful ways!