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.
Another tool the Federal Reserve can use to impact the supply of money involves changing the discount interest rate. This is a rate at which banks must borrow money to achieve the required reserve levels. If the Fed lowers the discount rate, it will drive down the interest rate that other banks can charge for short-term loans. Doing so sends a signal that the rate that banks should charge for loans to customers should also decrease. As the interest rate on loans and decreases, more loans are taken out and more money is injected into the economy. Another technique the Federal Reserve Bank can use to impact us a lot of money is to increase the public's confidence in the banking system in the United States. Increasing confidence results in a reduction in the tendency to hoard cash. As a result, individuals may be more willing to spend money and this tends to increase the supply of money in the economy. The fourth technique involves what are referred to as open market purchases. The Fed can apply or sell government securities and in doing so can either increase or decrease the supply of money in the economy. When the Fed wants to increase the supply of money in the economy, it buys gove...