CURRENTLY

CURRENTLY,NO MAJOR CENTRAL BANK CLOSELY TARGETS THE MONEY
SUPPLY.WHY DO YOU THINK THIS IS THE CASE?STILL,NO MAJOR CENTRAL
BANK COMPLETELY IGNORES MONEY GROWTH NUMBERS.WHY?
Central banks use several different methods to increase or decrease the amount of money in the
banking system. These actions are referred to as monetary policy. While the Federal Reserve
Board—commonly referred to as the Fed—could print paper currency at its discretion in an
effort to increase the amount of money in the economy, this is not the measure used, at least not
in the United States.
The Federal Reserve Board, which is the governing body that manages the Federal Reserve
System, oversees all domestic monetary policy. They are often referred to as the Central Bank of
the United States. This means they are generally held responsible for controlling inflation and
managing both short-term and long-term interest rates. They make these decisions to strengthen
the economy, and controlling the money supply is an important tool they use.
If a nation’s economy were a human body, then its heart would be the central bank. And just as
the heart works to pump life-giving blood throughout the body, the central bank pumps money
into the economy to keep it healthy and growing. Sometimes economies need less money, and
sometimes they need more.
The methods central banks use to control the quantity of money vary depending on the economic
situation and power of the central bank. In the United States, the central bank is the Federal
Reserve, often called the Fed. Other prominent central banks include the European Central Bank,
Swiss National Bank, Bank of England, People’s Bank of China, and Bank of Japan.
Let's take a look at some of the common ways that central banks control the money supply—the
amount of money in circulation throughout a country.
Why the Quantity of Money Matters
The quantity of money circulating in an economy affects both micro- and macroeconomic trends.
At the micro-level, a large supply of free and easy money means more spending by people and
by businesses. Individuals have an easier time getting personal loans, car loans, or home
mortgages; companies find it easier to secure financing. too.
At the macroeconomic level, the amount of money circulating in an economy affects things like
gross domestic product, overall growth, interest rates, and unemployment rates. The central
banks tend to control the quantity of money in circulation to achieve economic objectives and
affect monetary policy.
Print Money
Once upon a time, nations pegged their currencies to a gold standard, which limited how much
they could produce. But that ended by the mid-20th century, so now, central banks can increase
the amount of money in circulation by simply printing it. They can print as much money as they
want, though there are consequences for doing so. Merely printing more money doesn’t affect
the economic output or production levels, so the money itself becomes less valuable. Since this
can cause inflation, simply printing more money isn't the first choice of central banks.
Set the Reserve Requirement
One of the basic methods used by all central banks to control the quantity of money in an
economy is the reserve requirement. As a rule, central banks mandate depository institutions

(that is, commercial banks) to keep a certain amount of funds in reserve (stored in vaults or at the
central bank) against the amount of deposits in their clients' accounts. Thus a certain amount of
money is always kept back and never circulates. Say the central bank has set the reserve
requirement at 9%. If a commercial bank has total deposits of $100 million, it must then set aside
$9 million to satisfy the reserve requirement. It can put the remaining $91 million into
circulation.
When the central bank wants more money circulating into the economy, it can reduce the reserve
requirement. This means the bank can lend out more money. If it wants to reduce the amount of
money in the economy, it can increase the reserve requirement. This means that banks have less
money to lend out and will thus be pickier about issuing loans.
Central banks periodically adjust the reserve ratios they impose on banks. In the United States
(effective January 16, 2020), smaller depository institutions with net transaction accounts up to
$16.9 million are exempt from maintaining a reserve. Mid-sized institutions with accounts
ranging between $16.9 million and $127.5 million must set aside 3% of the liabilities as a
reserve. Institutions with more than $127.5 million have a 10% reserve requirement.
IMPORTANT:
On March 26, 2020, in response to coronavirus pandemic, the Fed reduced reserve requirement
ratios to 0%—eliminating reserve requirements for all U.S. depository institutions, in other
words.
Influence Interest Rates

In most cases, a central bank cannot directly set interest rates for loans such as mortgages, auto
loans, or personal loans. However, the central bank does have certain tools to push interest rates
towards desired levels. For example, the central bank holds the key to the policy rate—the rate at
which commercial banks get to borrow from the central bank (in the United States, this is called
the federal discount rate). When banks get to borrow from the central bank at a lower rate, they
pass these savings on by reducing the cost of loans to their customers. Lower interest rates tend
to increase borrowing, and this means the quantity of money in circulation increases.
Engage in Open Market Operations
Central banks affect the quantity of money in circulation by buying or selling government
securities through the process known as open market operations (OMO). When a central bank is
looking to increase the quantity of money in circulation, it purchases government securities from
commercial banks and institutions. This frees up bank assets: They now have more cash to loan.
Central banks do this sort of spending a part of an expansionary or easing monetary policy,
which brings down the interest rate in the economy.
The opposite happens in a case where money needs to be removed from the system. In the
United States, the Federal Reserve uses open market operations to reach a targeted federal funds
rate, the interest rate at which banks and institutions lend money to each other overnight. Each
lending-borrowing pair negotiates their own rate, and the average of these is the federal funds
rate. The federal funds rate, in turn, affects every other interest rate. Open market operations are
a widely used instrument as they are flexible, easy to use, and effective.
Introduce a Quantitative Easing Program

In dire economic times, central banks can take open market operations a step further and institute
a program of quantitative easing. Under quantitative easing, central banks create money and use
it to buy up assets and securities such as government bonds. This money enters into the banking
system as it is received as payment for the assets purchased by the central bank. The banks'
reserves swell up by that amount, which encourages banks to give out more loans, it further helps
to lower long-term interest rates and encourage investment. After the financial crisis of 2007-
2008, the Bank of England, and the Federal Reserve launched quantitative easing programs.
More recently, the European Central Bank and the Bank of Japan have also announced plans for
quantitative easing.
The Bottom Line
Central banks work hard to ensure that a nation's economy remains healthy. One way central
banks accomplish this aim is by controlling the amount of money circulating in the economy.
Their tools include influencing interest rates, setting reserve requirements, and employing open
market operation tactics, among other approaches. Having the right quantity of money in
circulation is crucial to ensuring a stable and sustainable economy.
In my opinion conversely, if the Fed wants to decrease the money supply, it sells bonds
from its account, thus taking in cash and removing money from the economic system.
Adjusting the federal funds rate is a heavily anticipated economic event.

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CURRENTLY,NO MAJOR CENTRAL BANK CLOSELY TARGETS THE MONEY

SUPPLY.WHY DO YOU THINK THIS IS THE CASE?STILL,NO MAJOR CENTRAL

BANK COMPLETELY IGNORES MONEY GROWTH NUMBERS.WHY?

Board—commonly referred to as the Fed—could print paper currency at its discretion in an

in the United States.

sometimes they need more.

amount of money in circulation throughout a country.

Why the Quantity of Money Matters

mortgages; companies find it easier to secure financing. too.

Set the Reserve Requirement

economy is the reserve requirement. As a rule, central banks mandate depository institutions

Influence Interest Rates

Engage in Open Market Operations

Central banks affect the quantity of money in circulation by buying or selling government

which brings down the interest rate in the economy.

Introduce a Quantitative Easing Program

The Bottom Line

circulation is crucial to ensuring a stable and sustainable economy.

Adjusting the federal funds rate is a heavily anticipated economic event.

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