According to the simulation, there are three key economic tools used by the Federal Reserve to control monetary policy.1. Spread between the discount rate and the federal funds rate2. Required reserve ratio3. Open Market OperationsThese economic instruments influence the money supply in the following ways:1. Difference between discount rate and federal funds rate: Banks can borrow from the Fed if the discount rate charged by the Fed is lower than the federal funds rate charged by other banks. When the discount rate decreases, banks shift their source of lending from other banks to the Fed. By doing so, the total amount of money in the system increases. If the spread is positive, banks will always borrow from other banks, this will have no effect on the money supply.2. Required reserve ratio: percentage of deposits that a bank holds as reserves. The Fed mandates the report. When the ratio decreases, banks are required to hold a smaller percentage of reserves and can lend more to their customers, in turn increasing the money supply in the economy. The opposite can occur, causing banks to drain the system due to a decrease in the money supply. Open market operations: Items such as Treasury bills and bonds are sold to investors through auctions. Selling these tools drains money from the system, while purchasing these items will release money into the system. The three tools that influence the money supply will also influence three macroeconomic indicators. The three indicators are gross domestic product, the inflation rate and the unemployment rate.1. Gross Domestic Product: Gross domestic product will increase as the money supply increases. High levels of money in the system will stimulate investment… middle of paper… to alleviate extreme inflation or depression in our economy. Each tool can influence aggregate demand in our system, which results in a change in GDP, inflation, and change in unemployment rates. References Federal Reserve Bank Of Dallas, (n.d.). Everyday Economics: The Federal Reserve, Monetary Policy, and the Economy. Retrieved May 11, 2007, from http://www.dallasfed.org/educate/everyday/ev4.htmlFederal Reserve Bank Of San Francisco, (2006). US Monetary Policy: An Introduction. Retrieved May 12, 2007, from http://www.frbsf.org/publications/federalreserve/monetary/Federal Reserve Board, (2007). Retrieved May 11, 2007, from http://www.federalreserve.gov/policy.htmUniversity of Phoenix. (2007). Monetary policy. Retrieved May 11, 2007, from University of Phoenix website, rEsource, Simulation, MBA501—Forces Influencing Business in the 21st Century.