Question

By what four means does the Federal Reserve control the money supply; how does it work?

Answer 1

1. Discount lending - Fed changes the rate at which it lends money to commercial banks. In case of recession, rates are lowered buy increased during expansion
2. Reserve requirements- The amount of deposit which a commercial bank has to keep as liquid is called resrve requirement. It is increased during expansion so that amount of lending decreases. But it is decreased during depression.
3. Open market operation - it is the market where fed sells and buys government bonds. It buys during recession to increase money supply. It sells during expansion to decrease money supply
4. Term auction facility works like change in discount rate.