ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -The Fed controls the supply of money by increas-ing or decreasing the monetary base. The monetary base is related to the size of the Fed’s balance sheet; specifically, it is currency in circulation plus the deposit balances that depository institutions hold with the Federal Reserve.

Detailed explanation-2: -The Federal Reserve, the central bank of the United States, provides the nation with a safe, flexible, and stable monetary and financial system.

Detailed explanation-3: -Conducting monetary policy If the Fed, for example, buys or borrows Treasury bills from commercial banks, the central bank will add cash to the accounts, called reserves, that banks are required keep with it. That expands the money supply.

Detailed explanation-4: -The Fed implements monetary policy primarily by influencing the federal funds rate, the interest rate that financial institutions charge each other for loans in the overnight market for reserves. Fed monetary policy actions, described below, affect the level of the federal funds rate.

Detailed explanation-5: -Before producing money and putting it into circulation in the form of cash (coins and notes), countries’ central banks, which are responsible for issuing money, plan the measures needed to ensure the stability of the money supply. Another type of money is bank money, which is created by commercial banks.