Quiz today. Also talking about controlling the money supply.It seems like the most powerful means of adjusting the money supply would be to adjust the required reserve rate, since that adjusts both the cash reserves of the bank and the money multiplier, but it’s not used much. In theory, it’s powerful, but in actual practice you can’t force people to borrow that extra money, so it tends to not generate the full effect that simple math would suggest.
The second tool is adjusting the discount rate. This is the rate at which the government will loan money to financial institutions.
The third tool, and the most commonly used, is federal open market operations. The Fed goes and buys or sells government bonds. When the Fed buys a government bond, it puts additional cash into circulation. When the Fed sells a bond, it takes that money out of circulation.