Money Supply- The Fed

According to an essay published on the University of Rhode Island website, there are four primary mechanisms that the Federal Reserve Bank uses to impact the supply of money in the United States. The first involves raising or lowering required reserve rates. The Federal Reserve Bank establishes rates which prescribe the amount of cash reserves that a bank must have on hand at any given time. The less cash that a bank has in these required reserves, the less likely it is to make loans. The more free cash the bank has on hand, the more likely it is to make loans. Loans tend to increase the supply of money in the economy. Therefore, by lowering the reserve rate the Federal Reserve is able to add to the supply of money in the economy.

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Category: Economics - M