The Federal Reserve and Macroeconomic Factors IntroductionThe Federal Reserve controls the United States economy through a variety of tools. They use these tools to shape US monetary policy in order to promote economic growth and reduce the inflation rate and unemployment rate. By adjusting these tools, the Fed is able to control the quantity of money in the supply. By controlling the quantity of money, the Fed can influence macroeconomic indicators and steer the economy away from runaway inflation or recession. The Federal Reserve The Federal Reserve uses three main tools to control the money supply. The first tool is open market operations. These operations consist of the purchase and sale of government bonds to commercial banks and the public. Open market operations are the most important tool the Fed can use to influence the money supply (Brue, 2004, p. 252). By purchasing bonds from the open market, the Federal Reserve increases the reserves of commercial banks which in turn will increase the country's overall money supply. The opposite is true if the Fed sells bonds on the open market. In this way, the Fed reduces banks' reserves and, in turn, takes money out of the system. By being able to control how much money commercial banks can lend, the Fed has a very powerful tool to fix the economy. The second tool used by the Federal Reserve is the reserve ratio adjustment. The reserve ratio is the ratio of the required reserves that the commercial bank must maintain to the bank's outstanding check deposit liabilities (Brue, 2004, p. 254). By raising and lowering the ratio, the Fed can control how much commercial banks can lend. For example, if the Fed reduces the reserve ratio, commercial banks will now have more excess reserves which will allow them to lend more money to businesses or individuals. Conversely, by increasing the ratio, the Fed forces banks to lend less money due to fewer excess reserves. If the bank is deficient in the amount of reserves it has, it is forced to reduce controllable deposits and subsequently reduce the money supply. It may also need to increase its reserves by selling bonds, which would also reduce the money supply (Brue, 2004, p. 274). Finally, the last tool the Fed can use is to adjust the discount rate. The discount rate is the interest rate at which the Federal Reserve charges commercial banks for a loan (Brue, 2004, p..