The Fed's Tools of Monetary Policy

AP Macroeconomics Unit 4 Part 4

           Expansionary: (Easy Money). The Fed can lower the reserve requirement, which means that money that was required reserves becomes excess reserves so the bank can make loans. If the Fed wants the banks to borrow more money, they would lower the discount rate. To expand the money supply, the Fed will buy bonds.

          Contractionary: (Tight Money). The Fed can raise the reserve requirement, which means that they take the banks excess reserves and makes them required reserves. If the Fed wants to discourage banks from borrowing money, they would raise the discount rate. To reduce the money available in the money supply, the Fed will sell bonds.