There are four types of monetary policy

1.Bank Reserve Requirement

2.Open Market operations
3.Federal Fund Rate
4.Discount Rate
Through reserve requirements, the central bank requires
banks and other depository institutions to hold a certain
amount of funds in reserve to meet outflows of money, such
as customer withdrawals. Banks may hold these reserves as
cash in their vaults, as deposits with the central bank or as a
combination of the two. When a central bank's policy-
making body, such as the Federal Reserve Open Market
Committee, wants to expand the money supply, it can lower
reserve requirements. This puts more money into circulation
by freeing banks to engage in more lending. Raising reserve
requirements, in contrast, lowers the money supply by
requiring banks to hold more money in reserve, making less
available for lending.


An important type of monetary policy tool, open
market operations involve the purchase and sale of
government securities on the open market by
central banks. In the United States, the Federal
Reserve Bank of New York conducts open market
operations. When the central bank wants to
expand the money supply, it purchases securities
from a bank, increasing that bank's reserves as
payment. This gives that bank more reserves than
it wants, freeing it to lend the funds. To reduce the
money supply, the Federal Reserve sells
government securities to banks and receives
reserves as payment, which lowers those banks'
supply of reserves.

The federal funds rate is an interest rate that
banks charge each other for short-term loans.
Federal Reserve policy makers adjust this
interest rate in response to economic
conditions. When inflationary pressures appear
in the economy, the Federal Reserve often
increases the federal funds rate, making it more
expensive to borrow reserves and thus
reducing the money supply. Lowering the
federal funds rate expands the money supply.



The discount rate is the interest rate that the
Federal Reserve and other countries' central
banking authorities charge banks and other
depository institutions for borrowing reserves. The
discount rate is typically higher than the federal
funds rate, to discourage banks from turning to
this lending source before other alternatives.
Central banks can lower the discount rate, to
expand the money supply, or raise the rate to
reduce it.