Finance, Forex and Investments

How the central bank can increase the money supply?

How the central bank can increase the money supply? Thanks a LOOOOOOOOOOT!!!!!

Public Comments

1. By printing more money, obviously.
2. The primary mechanism is through "open market operations". The Federal Reserve Board's (the Fed) Federal Open Markets Committee (FOMC) buys treasury securities- mostly T-bills- in the open market. So, former owners of treasuries now have cash that they eventually deposit in banks that do what they do. To take money out of the economy, the Fed does the opposite. It sells treasuries in the open market. This absorbs cash from the economy by replacing the cash with governement securities. This is also why the size of the US government debt is overstated. When the Fed and other Federal agencies own treasuries, the government is effectively paying interest to itself. Two otherinsignificant and rarely or never used methods are changes to bank "reserve requirements" and lending via the "discount window".
3. The Fed can use three monetary tools: 1) Open Market Operations; sell government securities in order to increase the money supply. 2) Adjusting Discount Rate; lower interest rate in order to increase the money supply. 3) Adjusting the Required Reserve Ratio; give banks the ability to lend more in order to increase the money supply. This rarely occurs.
4. Open Market Operations are the means of implementing monetary policy by central bank controls, its national money supply by buying and selling government securities, or other instruments. Monetary targets, such as interest rates or exchange rates are used to guide this implementation. The Discount Rate is a financial concept based on the future cash flow in lieu of the present value of the cash flow. The divisor in the discount rate formula is the resultant future value, including income. The concept of a discount rate differs from that of an interest rate, most notably in that the divisor in the interest rate formula is the original investment. The reserve requirement is a bank regulation that sets the minimum reserves each bank must hold to customer deposits and notes. These reserves are designed to satisfy withdrawal demands, and would normally be in the form of fiat currency stored in a bank vault, or with a central bank. The reserve ratio is sometimes used as a tool in monetary policy, influencing the country's economy, borrowing, and interest rates.