REQUIRED RESERVE RATIO Fed makes an impression on the supply of money by made changes in the required reserve ratio. One should know the fact that financial institutions hold certain percentage of all deposits on reserve. This move shrinks and reduces the amount through this banks expands the supply of money in the market.
OPEN MARKET OPERATION When we use the term open market operations, it refers to the issuance or sale and purchase of treasury bills government securities to the public. It is a tool used to expand or contract the amount of reserves in the system and thus the money supply.
DISCOUNT RATE The rate of interest that Fed charges on banks over their short term loans. Discount changed and modified according to the rate of federal funds.
2. The changes that they made are stated below
If fed reserve ratio increases the deposit multiplier will be smaller due to this Fed takes an initiative by reduces the money through which bank expands the supply of money in the market. Fed also takes other initiative such as reduces the supply of money by made an inclined in required reserve ratios.
Sold securities in the open market due to this practice the decrement in the banks reserve means the supply of money also declines. In short, sell securities and contracts the money supply and also the reserves of the commercial banks.
Increment in discount rate makes an impression on the federal reserves. When the interest rate increases people tends to take more loans for the investment purposes and also saved their hard income money in the fixed deposits in order to get better return on their investments.
3. The changes that they made are stated below
If fed reserve ratio decreases the deposit multiplier will be larger due to this Fed takes an initiative by increases the supply of money through which bank expands the supply of money in the market. Fed also takes other initiative such as reduces the supply of money by made an inclined in required reserve ratios means now bank in a position of excess reserves and uses these reserves in issuing new loans.
By using and effective open market operation resulted on the expansion and the contraction of the money supply.
Decrement in the discount rate shakes the economic growth due to which recession prevails in the economy.
4. In todays prevailing economic situation bank uses an effective and flexible monetary policy in order to increase the supply of money. The changes would be
By adopting the lower discount rate which increases the supply of money.
Uses the strategy of lower required reserve ratio resulted in the increment in the supply of money.
Another technique is to use an appropriate and effective open market operation in which fed purchases the securities means money is giving back to the public which in the end increases the supply of money.
On the whole, it is recommended that fed must uses more open market operation due to the above mention reasons.