Question

Explain two ways by which the Fed can increase the monetary base. Why is the effect of the Fed’s actions on bank reserves less exact than the effect on the monetary base?

Answer 1

The FEd, like any central bank, alters the monetary base via open market operations, which includes majorly purchase/sale of the bonds. If the Fed purchase bonds, then the process includes an amount of money transfer (in terms or liuabliliy/deposit/cash) from Fed to any commercial bank(s). That amount which is creadited, increases the monetary base by the process of money multiplier, which is determined by reserve ratios, etc. Hence, one method is to purchase bonds. Another method would be to discount the extending loans, which would lead to the same process.

The monetary base is distributed into currency (cash reserve) and deposits (bank reserves). Yet the Feds can alter the monetary base, the distribution however, is not in the hands of Feds. That depends on the rules/regulations and conditions in the money and asset market in the economy. Differing required reserve ratio among economy attributes to differing reserves. That is the reason of Fed's actions on bank reserves less exact.