Using Monetary Policy, The Federal Reserve Increases To Reduce The Money Supply In The Economy.. Central banks use several different tools to increase or decrease the amount of money in circulation (also known as the money supply). The fed buys bonds, which increases the supply of federal funds, which lowers the interest rate, and leads to a decrease in intended investment spending and aggregate expenditure and output.

While the federal reserve board—commonly known as the fed—could introduce more currency at its discretion to increase the amount of money in the economy, this measure is. When overall demand slows relative to the economy's. Central banks use several different tools to increase or decrease the amount of money in circulation (also known as the money supply).