Monetary Policy
The Fed another name for the Federal Reserve Bank that makes the central bank in the United States has three tools of monetary policy they can use to control the money supply. They are open-market operations, the reserve ratio, and the discount rate. These three tools used by the Fed influence the money supply have an impact on gross domestic, product (GDP), inflation, and unemployment. The Fed's open-market operations consist of the buying of government bonds from, or the selling of government bonds to, commercial banks and the public. Open-market operations are the Fed's most important instrument for influencing the money supply (p.270). When the Fed decides to buy government bonds from commercial bank or/and the general public the reserve of the commercial banks increase and when they decide to sell the same bond, commercial banks' reserve are reduce. Buying bonds increases the reserves banks will hold, this enables banks to lend more money and they can reduce interest rates.......
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