Tools used by the federal reserve to control money supply

This multiple expansion of the money supply is called the multiplier effect. Today, the Fed uses its tools to control the supply of money to help stabilize the economy. When the economy is slumping, the Fed increases the supply of money to spur growth.

Conversely, when inflation is threatening, the Fed reduces the risk by shrinking the supply. While the Fed's mission of "lender of last resort" is still important, the Fed's role in managing the economy has expanded since its origin.

Board of Governors of the Federal Reserve System. Fiscal Policy. Federal Reserve. Monetary Policy. Actively scan device characteristics for identification. Use precise geolocation data. Select personalised content. Create a personalised content profile. Measure ad performance. Select basic ads. Create a personalised ads profile. Select personalised ads. Apply market research to generate audience insights. Measure content performance. Develop and improve products.

List of Partners vendors. Your Money. Personal Finance. Your Practice. Popular Courses. Monetary Policy Federal Reserve. Part Of.

The Federal Reserve. Interest Rates. Interest Rate Impact on Consumers. Table of Contents Expand. Evolution of the Federal Reserve.

Reserve Ratio. Discount Rate. For example, if the Federal Reserve wants to stimulate the economy by increasing the money supply, it can do so by lowering the discount rate. That allows commercial banks to borrow money more cheaply, which enables them to make more loans at lower rates.

As a result, the amount of currency in circulation increases. Similarly, if the Federal Reserve wants to reduce inflation e. This motivates them to make fewer loans at higher rates, which reduces the money supply.

Please note that the name of the discount rate differs across central banks. However, despite the different names, they all describe the same interest rate. Reserve requirements are a means to control the money supply by setting a minimum amount of cash reserves all commercial banks must hold in relation to their deposits.

That means, the central banks can increase the amount of cash commercial banks must keep in their vaults to decrease the amount of money in circulation and vice versa.

It can do this by increasing the reserve requirements. As a result, the amount of money in circulation decreases. Meanwhile, if the Fed wanted to promote lending to stimulate the economy, it could reduce the reserve requirements to increase the money multiplier, which would lead to an increase in the money supply.

Since the economy does not influence the quantity of money, money supply is considered perfectly vertical on models. An increase in the money supply results in a decrease in the value of money because an increase in the money supply also causes the rate of inflation to increase.

As inflation rises, purchasing power decreases. The money supply roughly includes both cash and deposits that can be used almost as easily as cash. Governments issue paper currency and coin through some combination of their central banks and treasuries. Influencing interest rates, printing money, and setting bank reserve requirements are all tools central banks use to control the money supply. Other tactics central banks use include open market operations and quantitative easing, which involve selling or buying up government bonds and securities.

An increase in the money supply means that more money is available for borrowing in the economy. Definition: The total stock of money circulating in an economy is the money supply.