Monetary Policy Tools

Making Money

The Treasury creates the paper money and distributes it to the Federal Reserves

The banks distribute the money into the economy

The Federal Reserve Ratio determines how much money a bank can legally lend.

The RRR is the required fraction of deposits that banks must keep.

Reserve Requirements

A reduction of the RRR would let banks make more loans

An increase of the RRR would cause the money supply to shrink

Setting Rates

The discount rate is used as a mechanism to make sure sufficient funds are available for the economy.

The Federal Reserve makes the decisions on monetary policy

The prime rate is the rate of interest that banks charge on short-term loans to their best customers

Open Market Operations

Open market operations are buying and selling of government securities to alter the supply of money.

The FOMC can chose to decrease the money supply and issue an open market bond sale.

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