List and describe the three major monetary policy tools the Federal Reserve can use to increase the money supply. Be specific in your response regarding which direction the tool would need to change in order for the money supply to grow

Answer 1

Open market operations are when the Fed buys or sells U.S. government securities in financial markets. In order to increase the money supply, the Fed buys government securities (called an open market purchase). As the Fed makes open market purchases, the money paid by the Fed to the seller of the securities will result in an increase in bank reserves and the money supply will ultimately increase. Another option the Fed uses to increase the money supply is to lower the discount rate. The discount rate is the interest rate charged by the Fed to banks that need to borrow reserves. The lower the discount rate is relative to the federal funds rate, the more likely the banks are to borrow from the Fed. As a bank borrows from the Fed, the bank's reserves increase while the reserves of no other bank decrease, creating an increase in reserves for the banking system. The final monetary policy tool used by the Fed is changing the required reserve ratio. If the Fed wants to increase the money supply, they will decrease the required reserve ratio, allowing banks to loan a larger portion of checkable deposits.