Economics » Monetary Policy and Bank Regulation » How a Central Bank Executes Monetary Policy

Key Concepts and Summary

Key Concepts and Summary

A central bank has three traditional tools to conduct monetary policy: open market operations, which involves buying and selling government bonds with banks; reserve requirements, which determine what level of reserves a bank is legally required to hold; and discount rates, which is the interest rate charged by the central bank on the loans that it gives to other commercial banks. The most commonly used tool is open market operations.

Glossary

discount rate

the interest rate charged by the central bank on the loans that it gives to other commercial banks

open market operations

the central bank selling or buying Treasury bonds to influence the quantity of money and the level of interest rates

reserve requirement

the percentage amount of its total deposits that a bank is legally obligated to to either hold as cash in their vault or deposit with the central bank


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