1. 0pen market operations
Open market operations is the buying and selling of government bonds by the Central Bank. When the Central Bank buys a government bond from a bank, that bank acquires money which it can lend out. The money supply will increase. An open market purchase puts money into the economy.
2. Discount rate
When the Central Bank makes a loan to a member bank, the loan is called a discount loan. The interest rate on a discount loan is called the discount rate.
Lowering the discount rate encourages banks to take out more discount loans while raising the rate discourages banks from borrowing from the Central Bank. Therefore, lowering the discount rate puts money into the economy; raising the discount rate takes money out of the economy.
3. Reserve ratio
The reserve ratio is the percentage of deposits banks are required to hold as vault cash and not loan out.. Lowering the reserve ratio allows banks to loan out a greater fraction of deposits and the money supply would increase. Raising the reserve ratio would cause the money supply to shrink.
