discount rate. The Fed can raise or lower the interest rate it charges other banks for overnight loans. The third and most powerful tool is the reserve requirement. The reserve requirement is the percentage of deposits that a bank is required to have in cash (Grieder 47).
             Open market operations affect the economy by increasing or reducing the supply of money. If the Fed wants to increase the supply of money (thereby reducing interest rates) it will buy government securities on the open market. The Fed is then replacing government securities, which are not counted in the primary money supply, with money. To reduce the supply, the Fed does just the opposite, selling government securities (Grieder 48-49).
             The discount rate is the amount of interest the Fed charges banks for overnight loans. The Federal Reserve sets a percentage of deposits that all banks must keep in cash, this is called the reserve requirement. If a bank loans out to much money, they have to borrow from the Fed to meet the requirement. If the discount rate is lower than the rates banks can charge on loans, they will loan out more money, increasing the money supply. If the discount rate is higher, banks will loan out less money (Grieder 50).
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