How the Federal Reserve can change the money supply?
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M$3 Answers
These are the following:
1. Open Market Operations
2. Changing Reserve Limits on Banks
3. Changing the discount rate to banks
By being involve in Open Market Operations, the Federal Reserve can be receiver and taker of funds in the economy by buying Government Bonds. With regards to the Reserve Limits, the money supply tends to change higher when the reserve requirement is lowered whereas the opposite happens when the reserve requirement is adjusted higher.
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M$the fed can also lower the reserve requirement held by banks thereby allowing them to lend more (increasing the money supply) or raise the reserve requirement causing banks to hold more funds thus restricting the supply of money available.
Degree in economics
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M$open market operations-The purchase or sale of U.S. government securities by the Fed.
open market purchases-The Fed’s purchase of government bonds from the private sector.
open market sales-The Fed’s sale of government bonds to the private sector
2. Other Tools of the Fed
CHANGING RESERVE REQUIREMENTS
CHANGING THE DISCOUNT RATE
discount rate-The interest rate at which banks can borrow from the Fed.
federal funds market-The market in which banks borrow and lend reserves to and from one
another.
federal funds rate-The rate on reserves interest that banks lend each other
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