Monetary policy consists of the steps the central bank of a nation can take in order to regulate the nation's money supply. For instance, a central bank might reduce interest rates during a recession in order to make loans more readily available to other banks and thus stimulate economic recovery. Show
In the United States, the central bank is actually a system of twelve banks known as the Federal Reserve System, or more simply, the Fed. As with any central bank, the main job of the Federal Reserve is to conduct monetary policy for the U.S. government - to regulate the economy by regulating the supply of money in circulation. There are three basic ways in which the Fed accomplishes this. Open Market OperationsThe primary method by which the Fed conducts monetary policy is through the buying and selling of government securities on the open market. This process, called open market operations, is conducted regularly by the Fed as a way to manipulate the money supply. Eight times a year, the Federal Open Market Committee (FOMC) meets to review and discuss reports on previous and prospecive economic developments. After the reports, each committee member presents his or her views on the state of the economy and a recommendation on monetary policy for the period of time until the next FOMC meeting. Upon reaching a consensus on monetary policy, the FOMC directs the Federal Reserve Bank of New York on the execution of sales or purchases of government securities. When the Fed buys securities on the open market, cash is transferred to these banks, increasing the nation’s money supply. Conversely, when the Fed sells government securities, these banks have less cash available to them – a decrease in the nation’s money supply. In this way, the Fed can achieve specific monetary policy goals with short-term, sometimes daily, transactions. Reserve RatioBecause commercial banks keep reserve accounts with the Fed, either as actual deposits at a Federal Reserve bank or as “vault cash” at their own location, these transactions are made instantaneously and electonically. The amount of money kept in reserve by commercial banks is known as the reserve ratio and is another tool used by the Fed to implement monetary policy. The Fed may raise the amount of money banks are required to keep in reserve in order to decrease the money supply, or they may lower the requirement in order to make the banks more liquid and stimulate the economy. This mechanism is more drastic in its effect upon the commercial banks, and for this reason is used infrequently by the Fed. Interest RatesInstead, the Fed may use interest rates, such as the discount rate and the federal funds rate, to encourage or discourage lending among banks. The discount rate is the interest rate the Fed charges on loans it makes to commercial banks. By reducing the discount rate, the Fed makes it more attractive for commercial banks to borrow money. As they do so, the nation's money supply increases and the economy expands. Similarly, commercial banks that keep monetary reserves with the Fed can loan this money, these federal funds, to each other. These loans are made at the Federal Funds Rate, another rate that the Fed has the power to raise or lower in order to impact the money supply.
Current Release RSS Data DownloadRelease Date: November 22, 2022 Table 1Money Stock Measures. Billions of dollars unless otherwise noted.
Table 2Seasonally Adjusted Components of M1 and Non-M1 M2. Billions of dollars.
Table 3Not Seasonally Adjusted Components of M1 and Non-M1 M2. Billions of dollars.
Back to Top Last Update: November 22, 2022 What action can the Fed take to increase the money supply?The Fed can increase the money supply by lowering the reserve requirements for banks, which allows them to lend more money. Conversely, by raising the banks' reserve requirements, the Fed can decrease the size of the money supply.
Which of the following are actions that the Fed may take to increase the money supply quizlet?To expand the money supply the Fed could lower the required reserve ratio, lower the discount rate, or purchase government securities.
What are three ways the Fed can increase the money supply?The Fed uses three main tools to accomplish this: By setting bank reserve requirements2. By setting the discount rate3. Via open market operations4.
Which of the following will increase with an increase in the money supply?According to monetarists, a rapid increase in the money supply can lead to a rapid increase in inflation. This is because when money growth surpasses the growth of economic output, there is too much money backing too little production of goods and services.
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Which of the following are actions that the fed may take to increase the money supply?
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