Question

What tools does the Federal Reserve use to control the supply of money? Which is used most frequently? Which is most potentially powerful? Why?

Answer 1

The federal reserve was created to help the economy from collapses and given some powerful tools to affect the supply of money.

the federal reserve (Fed) uses three main tools to accomplish this they are ;-

1.change in Reserve ratio

2.setting the discount rate

3.Opemarket operations

RESERVE RATIO

a change in reserve ratio is not often used,but is potentially powerful.reserve ratio can be termed as the percentage of reserves a bank is required to hold against deposits.A decrease in the ratio allows bank to lend more,thus increase the money supply and in increase just opposite

DISCOUNT RATE

Discount rate is the interest rate the Federal reserve charges commercial banks that need to borrow additional reserves.The Fed sets this rate
If the Fed wants to give banks more source it can reduce interest rate it charges,Thereby including banks to borrow more.like that it can immerse up reserves by raising its rate at persuading the banks to reduce borrowing

OPEN MARKET OPERATIONS

The buying and selling of government securities by the Federal reserve  is called open market operations. if the Fed buys back securities(eg:treasure bills) from large banks it increases the money supply in the hand of the public on the other hand the money supply decreases when the Fed sells a security

+OPEN MARKET OPERATION IS THE PRIMARY AND FREQUENTLY USED TOOL BY THE FEDERAL RESERVE TO INFLUENCE THE SUPPLY

+RESERVE RATIO IS MOST POTENTIALLY POWERFUL

The Federal reserve uses the reserve ratio as an important monetary policy tool to increase or decrease the economy's money supply it is the most potentially powerful as it can lowers the reserve ratio to give banks more money to lend and charge up the economy and increases the reserve ratio when it needs to reduce the money supply and control inflation,reserve ratio is seldom used it is a key tool as The Fed may choose to lower the reserve ratio to increase the money supply in the economy. A lower reserve ratio requirement gives banks more money to lend, at lower interest rates, which makes borrowing more attractive to customers.