SECTION I

The Federal Reserve affects the money supply in several different ways. The Federal Reserve:

Sets the reserve requirement (the percentage of deposits that a bank must keep on hand for daily operations or in the Federal Reserve Bank). The rest of the money in the bank is usually used for loans to create interest.

Can loan money to banks when they are low on reserves.

Can buy and sell government bonds (certificates issued by a government or business that needs to borrow money and promises to pay the buyer back in the future with interest).