How the Federal Reserve Manages Money Supply

The Federal Reserve was created to help reduce the injuries inflicted during economic downturns by changing the supply of money.

The Fed primarily manages the growth of bank reserves and money supply to allow a stable expansion of the economy.

Their tools include: changing reserve requirements, changing the discount rate, and by open market operations.

Changing the reserve ratio is the percent change of reserves a bank is required to hold against deposits. A decrease will allow the bank to lend more and thereby increasing money supply. An increase will have the opposite effect.

Discount rate is the interest rate the central bank charges commercial banks that need to borrow additional reserves. If the rate is low, it encourages spending and if it is high, it encourages saving.

Open market operations consist of buying and selling of government securities by the Fed. If the Fed buys, it increases the money supply. If the Fed sells, the money supply decreases.