The congress can use several different methods to increase or decrease the amount of money in the banking system. These actions are referred to as monetary policy.
Modifying Reserve Requirements
The congress via the Federal reserve bank can influence the money supply by controlling the amount of funds banks must hold against deposits in bank accounts. Therefore, by raising the banks' reserve requirements, the Fed is able to decrease the size of the money supply and vice versa.
Changing Short-Term Interest Rates
By adjusting short-term interest rates, the Fed is able to change the money supply as well. The Federal Reserve Bank can effectively raise (or decrease) the availability of money by lowering (or raising) the discount rate that banks pay on short-term loans from the Fed.
Conducting Open Market Operations
The Fed will purchase government bonds if it wishes to expand the money supply. This increases the total amount of money in circulation by providing the securities brokers who sell the bonds with cash.
In contrast, if the Fed wants to reduce the amount of money in circulation, it will sell bonds from its account, bringing in cash and withdrawing money from the economy.
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