Introduction to Business Federal Reserve

The Fed or Federal Reserve has three primary ways of regulating money supply:
Reserve requirements, Open-Market Operations, and managing the Discount rate.

Reserve requirements are certain percentage amounts that banks are supposed to have on hand against its deposits. When the Fed raises the reserve requirement, the bank would have to put more money on reserve and thus be limited in the amount it can loan. A high reserve requirement correlates with a reduced money supply. A low reserve requirement on the other hand, does the opposite: it allows banks to lend more money, increasing the money supply. However, though this is a means of achieving growth the economy, it can result in inflation.

Open-market operations refer to the sale or buying of bonds. The government sells bonds to take money out of the economy and decrease money supply. When the government buys back bonds, it puts money back into the economy and thus increases money supply. Open-market operations are the most common tool used by the Federal Reserve.

Finally, there is the discount rate. The "discount rate" is the Fed's interest rate on loans for other banks. A high discount rate discourages borrowing and reduces the bank's lending ability while a low discount rate encourages borrowing, increases a banks' ability to loan and thus increases the money supply

The Fed uses all of these methods to regulate the money supply. The ultimate purpose of doing so is to keep the economy in check and preventing inflation or deflation.