Final answer:
The Fed can alter the money supply through open market operations, changing the discount rate, adjusting reserve requirements, and conducting repo and reverse repo operations. These tools regulate the availability of money and credit, ultimately influencing economic activity and interest rates.
Step-by-step explanation:
In addition to the buying and selling of bonds, known as open market operations, the Federal Reserve (the Fed) can affect the money supply by altering the discount rate and changing reserve requirements. The discount rate is the interest rate at which financial institutions borrow money from the central bank, and reserve requirements refer to the amount of funds that banks must hold in reserve against deposits made by their customers. Moreover, the Fed can engage in repos and reverse repos (repurchase and reverse repurchase agreements), which are short-term loans used to adjust the amount of bank reserves.
By adjusting these monetary policy tools, the Fed influences the availability of money and credit in the economy, which in turn affects economic activity. For example, when the Fed buys bonds, it injects money into the banking system, which can lower interest rates and increase lending and spending. Conversely, when the Fed sells bonds, it reduces the money supply, which can lead to higher interest rates and a slowing of economic activity.