One wise man once said, "Money is the root to all evil." From time to time, just about everyone has heard the saying, "Money doesn't grow on trees." So where does money come from? This is one question that will be examined within this paper along with other elements such as the tools used by the Federal Reserve to control money and how these tools influence the money supply. This paper will review the different monetary policies used to best describe how to achieve a balance between economic growth, low inflation, and the rate of unemployment. These four structures each represent a distinctive topic of how macroeconomic impact on business operations.
Tools Used to Control and Influence Money SupplyThe Federal Reserve controls the money supply as a way of changing interest rates in the economy. The three tools used to control the money supply are discount rate, required reserve ratio and open market operations.
Discount rate is the interest rate the Federal Reserve charges commercial banks that borrow from it. Often the Federal Reserve influences the federal funds rate which makes the discount rate change. Because the Feds set the discount rate, commercial banks do not borrow much from them. Required reserve ratio is the percentage of transactions deposit that commercial banks must hold as vault cash or on deposit. Required reserve ratio represents a cost to the banking system. The bank reserves, meanwhile are used in the day to day implementation of monetary policy by the Federal Reserve. (Federal Reserve Bank of NY) Open market operations are the main tool used to control the money supply. Through open market operations, the Federal Reserve buys and sells US government securities and treasury bonds in the secondary market in order to adjust the level reserves in the banking system.