Question

List the different methods the Federal Reserve Bank can use to increase the money supply in the economy?

Answer 1

The federal reserve can adopt several measures to increase the money supply in the market.

• Open market operations: The fed reserves can buy the government or treasury bonds form the market paying the institutions and banks in return. This will increase the amount of money supply in the market.
• Discount rate: Discount rate are the rates at which the FEd lend the funds to the banks. The lower the rates the more the banks can borrow from the Fed. To increase the money supply the FED reduces the discount rates.
• Reserve ration: Every bank has to keep some proportion of their saving and other deposit as the reserve. The higher the reserve rate the higher the bank has to keep money with them without lending. The Fed can reduce the reserve ration if they want to increase the money supply.