The Discount Rate

The Discount Rate The third tool in the Fed’s toolbox is the discount rate, the interest rate on the loans that the Fed makes to banks. A bank borrows from the Fed when it has too few reserves to meet its reserve requirements. This might occur because the bank...

Reserve Requirements

Reserve Requirements The Fed also influences the money supply with reserve requirements, which are regulations on the minimum amount of reserves that banks must hold against deposits. Reserve requirements influence how much money the banking system can create with...

Open-Market Operations

Open-Market Operations As we noted earlier, the Fed conducts open-market operations when it ·buys or sells government bonds. To increase the money supply, the Fed instructs its bond traders at the New York Fed to buy bonds from the public in the nation’s bond...

THE FED’S TOOLS OF MONETARY CONTROL

THE FED’S TOOLS OF MONETARY CONTROL As we have already discussed, the Federal Reserve is responsible for.controlling the supply of money in the economy. Now that we understand how fractional-reserve banking works, we are in a better position to under stand how...

THE MONEY MULTIPLIER

THE MONEY MULTIPLIER  The creation of money does not stop with First National Bank. Suppose the borrower from F national uses the $90 to buy something from someone who then deposits the currency in Second National Bank. Here is the T-account for Second National Bank:...