The Federal Reserve has three tools to control the money supply: 1) Changing required reserve ratios, where increasing the ratio decreases money supply and vice versa. 2) Changing the discount rate, where higher rates decrease borrowing and money supply, and lower rates have the opposite effect. 3) Engaging in open market operations, where the Fed issues securities to contract money supply and purchases securities to expand money supply.

1. Macroeconomics
MBA-III
Presentation:
Control of Money Supply By
The Federal Reserve
By: Hema Harjani

2. Three tools are available to The
Fed for changing the money
supply:
1. Changing the required reserve ratio;
2. Changing the discount rate; and
3. Engaging in open market operations.

3. The Required Reserve Ratio
• Increase in required reserve ratio,
less loans a bank can facilitate,
causing decrease in money supply.
• Decrease in required reserve ratio,
more loans a bank can make , Thus
increasing money supply.

4. For Example:
• If the required reserve ratio is 20%
and there is excess money supply,
then the Fed will set the required
reserve ratio at 40% then the total
loans a bank can make will be
decreased, from 80% to 60%, which
will cause a decrease in money
supply.

5. 2. Changing Discount Rate:
• Higher the discount rate, less the
borrowing banks want to do. So it will
decrease money supply.
• Lower the discount rate, more
borrowing banks will do, thus there
will be increased money supply.

6. 3. Engaging in open market
operations:
• Issue Government securities to
contract money supply because
when banks buy these , money
comes to Fed.
• Purchase government securities to
expand money supply by paying
money for these securities.

7. Thank You