Money and Monetary Policy

Money is created by making loans. When a bank makes a loan, it lends out money that didn’t exist before.

Monetary policy has to do with controlling the money Supply and Interest Rates. Understand the difference from Monetary and Fiscal policy.

Government-Policy

The FED’s (Federal Reserve Bank) toolbox consists of:

1. Open Market Operations

2. Discount Rate

3. Required Reserve Ratio

So what actions affect the money supply, and how?

Increase the Money Supply Decrease the Money Supply
Buy Bonds Sell Bonds
Decrease Discount Rate Increase Discount Rate

 

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