Instruments of Monetary Policy

Instruments of Monetary Policy


The Federal Reserve System uses three instruments of monetary policy: (1) the required reserve ratio, (2) the discount and federal funds rates, and (3) open market operations. All three instruments affect the economy by influencing the amount of money commercial banks create through loans.

In order to understand how the Fed uses these monetary policy instruments to influence the economy, it is necessary to understand the fractional reserve banking system.