Sample Essay
‘Open Market Operations’ is one of the tools used as part of the monetary policy. In order to facilitate banks reserves thereby increasing bank deposits, The Federal Reserve buys financial assets which include buying government bonds from the general public (Frank and Bernanke 626). It happens to be a continuous cycle whilst the government prints more money to pay for these bonds, the public in return deposits the money in commercial banks as receipts of selling bonds.
The ‘reserve requirement’ is characteristic of the minimum value of bank deposits commercial banks are allowed to keep. Similarly, if the Fed wants to facilitate a contractionary monetary policy, it would increase the reserve deposit ratio which would then lower down deposits and eventually the money supply. Likewise, a decline in this ratio would raise the supply of money (Frank and Bernanke 627).
Another way of manipulating the monetary policy is through ‘discount window lending’ (Frumkin 66). Commercial banks can resort to borrowing from the Fed at a discount rate when they are short of funds. This further facilitates increase in money supply as a result of an increase in bank deposits.
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