• Explain the difference between M1 and M2 money supply
• Explain the role of banks
• Understand the functions of the Federal Reserve System
• Understand what the Federal Reserve System does to carry out monetary policy

Recall that the U.S. money supply is categorized as M1 and M2 money. Banks act as financial intermediaries. And the Federal Reserve implements monetary policy.

 M1 vs. M2 Money

You can view the transcript for “Segment 303: The Money Supply” (opens in new window).

Banks as Financial Intermediaries

You can view the transcript for “What are Financial Intermediaries?” (opens in new window).

The Federal Reserve’s Monetary Policy Tools

Open Market Operations

You can view the transcript for “Segment 406: Open Market Operations” (opens in new window).

Changing the Reserve Requirement

You can view the transcript for “Segment 409: Reserve Requirements” (opens in new window).

Changing the Discount Rate

You can view the transcript for “Investopedia Video: Fed’s Discount Rate” (opens in new window).