The Federal Reserve System Tools for controlling the money supply

Reserve Requirement Amount bank must hold in its vaults against the amount of checking account deposits This amount is called the required reserves It is expressed as a percentage All additional reserves, called excess reserves can be used to make loans Increasing the reserve requirement decreases the money supply Decreasing the reserve requirement increases the money supply

Discount Rate The interest rate charged by the Fed to lend money to banks An increase in the discount rate results in a decrease in the money supply Banks will borrow less and then have less to lend out A decrease in the discount rate results in an increase in the money supply Banks will borrow more and have more to lend out

Open Market Operations Buying and selling government securities Savings bonds Treasury notes, bills, and bonds Carried out by the New York Federal Reserve Bank Buying = increased money supply Selling = decreased money supply