Unit 6 lesson 7- monetary policy tools 1- what is required reserve ratio? - the portion of a deposite that a bank must keep on hand 2- why does the fed rarely change the reserve requirment? - it can be disruptive to the whole banking system 3- how does the fed encourage banks to loan mor money? - by reducing the discount rate 4- how does a bond sale made by the fed affect the money supply? - the sale decreases the money supply 5- what is the policy used most by the fed change the money supply? - open market operations

1. The portion of a deposit that a bank must keep on hand. The required reserve ratio is a central bank regulation applied by most central banks. It sets the minimum amount of reserves that a commercial bank is required to hold.

2. It can be disruptive to the whole banking system. Central banks rarely raise the reserve requirements because it would create immediate liquidity problems for banks with low excess reserves.

3. By reducing the discount rate. When the economy gets slow, the Fed boosts growth and the money supply by decreasing reserve requirements and reducing the discount rate.

4. The sale decreases the money supply.

5. Open market operations. In order to implement their monetary policy, the Fed regularly favors the use of open market operations: buying and selling government-issued bonds.

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