Central banks have four primary monetary tools for managing the money supply. These are the reserve requirement, open market operations, the discount rate, and interest on excess reserves. These tools can either help expand or contract economic growth.
Reserve requirements are the amount of funds that a bank holds in reserve to ensure that it is able to meet liabilities in case of sudden withdrawals.
Discount rate the minimum interest rate set by the Federal Reserve for lending to other banks.
Open market operations (OMO) refers to a central bank buying or selling short-term Treasuries and other securities in the open market in order to influence the money supply.
Interest on reserves (IOR) is the rate at which the Federal Reserve Banks pay interest on reserve balances, which are balances held by DIs at their local Reserve Banks.
