Author Question: How can the Fed increase the money supply? How can the Fed decrease the money supply? Be ... (Read 65 times)

nevelica · **on:** Jun 30, 2018

How can the Fed increase the money supply? How can the Fed decrease the money supply? Be specific.

Question 2

Describe the three basic tools used by the Fed to change the money supply. Which of these tools is most relied on in practice? Least relied on? Why?

mcarey591 · **Reply #1 on:** Jun 30, 2018

Answer to Question 1

To increase the money supply the Fed should buy U.S. government securities on the open market, reduce the discount rate and/or reduce the required reserve ratio. Do the opposite to decrease the money supply.

Answer to Question 2

The Fed can use open market operations, change the required reserve ratio, or change the discount rate to change the money supply. In practice, the Fed most often relies on open market operations because it is the most flexible tool. It allows for the greatest fine-tuning of the money supply. The required reserve ratio is the tool least used in practice because it is potentially so powerful. Changing required reserves could change the money supply too much in one direction or another. Its use could be much like using a sledgehammer to pound in a finishing nail.