To implement its primary task of controlling money supply, there are three main tools the Fed uses to change bank reserves: The Tools A change in reserve ratio is seldom used but is potentially very powerful.
The reserve ratio is the percentage of reserves a bank is required to hold against deposits.
When the bank makes an additional loan, the person receiving the loan gets a bank deposit.
At this stage, when the bank makes a loan, the money supply rises by more than the amount of the open-market operation.
Looking for a Hero 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.
Throughout history, free market societies have gone through boom-and-bust cycles.
While everyone enjoys good economic times, the downturns are often painful.
A Framework That Provides Clarity During periods of “low visibility,” confusion reigns: for every indication of one trend, there seems to be a countertrend.
The key is to glean from the collective wisdom of reliable leading indicators a clear signal that the economy is headed for a turn.
(Read more on this subject in .) The discount rate is the interest rate that the central bank charges commercial banks that need to borrow additional reserves.
It is an administered interest rate set by the Fed, not a market rate; therefore, much of its importance stems from the signal the Fed is sending to the financial markets (if it's low, the Fed wants to encourage spending and vice versa).
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