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.
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|