Chapter 13 Appendix Outline
II. THE FEDERAL RESERVE AND CONTROL OF THE MONEY SUPPLY
A. Open Market Operations
	1. The Federal Reserve can increase the money supply by purchasing U.S. Treasury securities.
	a. The purchase of securities increases the amount of reserves in the system, thereby increasing loan activity.
	2. The Federal Reserve can decrease the money supply by selling U.S. Treasury securities.
	a. The sale of securities decreases the amount of reserves in the system, thereby decreasing loan activity.
	3. Open market operations are the tool generally used to alter the money supply.
B. Reserve Requirements
	1. The Federal Reserve can increase the money supply by lowering the reserve requirement.
	a. Lowering the reserve requirement increases excess reserves in the system, thereby increasing loan activity.
	2. The Federal Reserve can decrease the money supply by increasing the reserve requirement.
	a. Increasing the reserve requirement decreases excess reserves in the system, thereby decreasing loan activity.
	3. Changes in reserve requirements are rarely used to alter the money supply.
C. The Discount Rate
	1. The discount rate is the interest rate at which depository institutions can borrow from Federal Reserve Banks.
	2. The Federal Reserve can increase the money supply by lowering the discount rate.
	a. Lowering the discount rate gives depository institutions a greater incentive to borrow, thereby increasing their reserves and lending activity.
	3. The Federal Reserve can decrease the money supply by increasing the discount rate.
	a. Increasing the discount rate gives depository institutions less incentive to borrow, thereby decreasing their reserves and lending activity.
	4. Because depository institutions are discouraged from borrowing from their Federal Reserve Banks except as a last resort, the discount rate can change significantly without altering the money supply.

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