Monetary policy is like the thermostat of an economy, controlled by the central bank. Let's look at the tools they have at their disposal and how they use them.

• 🏦 What's It? Commercial banks have to keep a part of their deposits as reserves. This percentage is the required reserve ratio.
• 🎮 How It Works? Imagine a bank as a piggy bank. If the central bank says, "Hey, you need to stuff more money in the piggy bank and lend less," the money supply shrinks. Conversely, if the bank can put less in the piggy bank, they can lend more, increasing the money supply.
• 💡 Real-World Example: Rarely used because it's like playing with the bank's profitability, it can lead to sudden changes.

• 🏦 What's It? This is a special interest rate at which commercial banks borrow from the central bank.
• 🎮 How It Works? Lowering the rate allows banks to borrow more easily, lending more, and increasing the money supply. Raising it makes borrowing tougher, restricting the money supply.
• 💡 Real-World Example: During the 2008 financial crisis, the discount rate was lowered to help banks struggling with bad loans.

• 🏦 What's It? The central bank buying or selling short-term government bonds from banks.
• 🎮 How It Works? Buy bonds, and the money supply goes up (more lending). Sell bonds, and it goes down (less lending).
• 💡 Real-World Example: This is the go-to tool for many central banks and is like the steering wheel of a car, guiding the economy.