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How the Fed Creates Money

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Publication Date: February 2008

Publisher(s): National Center for Policy Analysis (U.S.)

Author(s): Pamela Villarreal; Bob McTeer

Funder(s): National Center for Policy Analysis (U.S.)

Funder(s): National Center for Policy Analysis (U.S.)

Topic: Economics (Economic research)

Keywords: Federal Reserve Money

Type: Brief

Abstract:

Signs of an economic slowdown, or recession, have prompted the Federal Reserve to lower interest rates. The Fed reduces interest rates by increasing the supply of money available to borrow. This additional money is distributed to banks and loaned to consumers. Assuming a constant demand for money, an increase in the quantity of money will cause interest rates to drop. But how does the Fed increase the money supply?