Question

How does the Federal Reserve control the money supply? (3 ways)

A) Adjusting tax rates, setting interest rates, and printing money
B) Regulating commercial banks, controlling the stock market, and issuing bonds
C) Open market operations, changing the discount rate, and altering reserve requirements
D) Influencing consumer spending, managing international trade, and adjusting fiscal policy

Answer 1

The Federal Reserve controls the money supply through open market operations, changing reserve requirements, and changing the discount rate.

Step-by-step explanation:

The Federal Reserve controls the money supply through three main methods:

1. Open market operations: This involves buying and selling government bonds with banks. When the Fed buys bonds, it increases the money supply as banks have more reserves to lend out. When it sells bonds, it decreases the money supply.
2. Changing reserve requirements: The Fed determines the level of reserves that banks are legally required to hold. By increasing or decreasing these requirements, the Fed can influence the amount of money banks can lend.
3. Changing the discount rate: The discount rate is the interest rate charged by the Fed on loans given to commercial banks. By raising or lowering this rate, the Fed can encourage or discourage borrowing, affecting the money supply.