In order to curb liquidity the central bank can

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rates by the banks. In order to curb liquidity, the central bank can resort to raising the bank rate and vice versa. (iii) Open Market Operation R efer to the buying and selling of government securities in the open market in order to expand or contract the amount of money in the banking system. (b) Monetary tools are used to control the money supply : 1- Reserve requirement ratio
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The Federal Reserve can increase the money supply by lowering the reserve requirement.Lowering the reserve requirement increases excess reserves in the system, thereby increasing loan activity. The Federal Reserve can decrease the money supply by increasing the reserve requirement.Increasing the reserve requirement decreases excess reserves in the system, thereby decreasing loan activity. 2-Discount Rate The Federal Reserve can increasing the money supply by lowering the discount rate. Lowering discount rate gives depository institutions a greater incentive to borrow, thereby increasing their reserves and lending activity. The Federal Reserve can decrease the money supply by increasing the reserve requirement. Increasing the reserve requirement decreases excess reserves in the system, thereby decreasing loan activity. 3 - Open Market Operation The Federal Reserve can increase the money supply by purchasing securities. The purchase of securities increases the amount of reserves in the system, thereby increasing loan activity. The Federal Reserve can decrease the money supply by selling securities.The sale of securities decreases the amount of reserves in the system, thereby decreasing loan activity.
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