Monetary Policy

The Fed has several tools to manage the money supply by manipulating the excess reserves held by the banks (Monetary Policy)

Fiscal Policy (Congress)
1) Tax
2) Spend

Monetary Policy (Fed)
1) OMO-Open Market Operations
     -Buy/Sell Bonds
2) Required Reserves
3) Discount Rate
     -Interest rate charged by the Fed for overnight funds to commercial banks
     -Does not change money supply directly
4) Federal Funds Rate
     -Interest rates charged by one commercial bank for overnight loans to another commercial bank
     -FOMC (committee)=Sets a federal funds rate and then uses OMO to guide the effected rate to the target rate

Monetary Policy Options: 
Expansionary Policy (Easy Money)
OMO: Buy bonds from the public
Required Reserves: Decrease reserve ratio
Discount Rate: Decrease the discount rate
Federal Funds Rate: Decrease federal funds rate

Contractionary Policy (Tight Money)
OMO: Sell bonds from the public
Required Reserves: Increase reserve ratio
Discount Rate: Increase the discount rate
Federal Funds Rate: Increase federal funds rate