Its important that you control the supply of money which is available in the country. The monetary policy which has been introduced by the US Federal Reserve and the countries central bank requires these important tools to control the supply of money available in the economy. These tolls includes the open market operations, the discount rates, fractional reserves and many more.
Open Market Operation:
The open market operation is one of the best tools to increase money supply. The Federal Reserve uses the open market to buy the treasury securities which belong to the government itself and which in turn can help in increasing the supply of money in small amount or percentage with a period of time. These treasury securities contain a treasury bonds which have a long life till decades. But the treasury notes have a life time of two to ten years. Moreover there are also treasury bills which increase in one year or maybe less than that. But besides all this these are the most favored instruments used by the Federal Reserve.
Discount Rate:
The next tool which the Federal Reserve uses to increase the money supply is the use of discount rate. When the banks have the requirement of day to day money than they borrow it from Federal Reserve and these loans carry such interests which are known as discount rates. The Federal Reserve adjusts the discount rates and while doing this delivers a clear and comprehensive message if the money supply will increase or decrease. The bank borrows the money from the Federal Reserve when the money supply decreases and this borrowed money is then used for the business so that it can expand and also towards the housing loans in order to increase money supply in the economy.
Fractional Reserve:
This is another tool which is used by the Federal Reserve to increase money and that is fractional reserve. This can happen at any time that the all the depository institutes including bank are required to some of the percentage of their check accounts which are interest bearing as well as non interest bearing as a shape of reserve with the Federal Reserve. Which means that the required reserves are actually the fraction of the deposits and the federal reserves uses these changes in the system to improve the impact in the market.
To increase the money supply the Federal Reserve will increase the Fed fund rates so that its easy foe the bank to lend more.
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