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 Fed can influence the money supply by modifying reserve requirements, which generally refers to the amount of funds banks must hold against deposits in bank accounts. By lowering the reserve requirements, banks are able to loan more money, which increases the overall supply of money in the economy.

Detailed explanation-3: -The Federal Reserve, as America’s central bank, is responsible for controlling the supply of U.S. dollars. The Fed creates money by purchasing securities on the open market and adding the corresponding funds to the bank reserves of commercial banks.

Detailed explanation-4: -Traditionally, the Fed’s most frequently used monetary policy tool was open market operations.

Detailed explanation-5: -When the Federal Reserve decreases the reserve ratio, it lowers the amount of cash that banks are required to hold in reserves, allowing them to make more loans to consumers and businesses. This increases the nation’s money supply and expands the economy.