Final answer:
The Federal Reserve System primarily controls the supply of funds in the economy. It manages the nation's monetary policy by adjusting the money supply, utilizing tools like open market operations, reserve requirements, and the discount rate to influence economic activity.
Step-by-step explanation:
The supply of funds in the economy is controlled primarily by the Federal Reserve System. The Federal Reserve, also known as the Fed, regulates the supply of money in the economy through its monetary policy decisions. It increases or decreases the money supply depending on whether the economy is in a contractionary period or an expansionary period, respectively. This is done in order to manage interest rates and credit conditions, which in turn influences the level of economic activity.
Article I, Section 8 of the U.S. Constitution gives Congress the power "to coin money" and "to regulate the value thereof." With the 1913 legislation that created the Federal Reserve, Congress delegated the power to manage the nation's monetary policy to the Fed. The Federal Reserve employs three traditional tools to implement monetary policy: open market operations, setting reserve requirements, and adjusting the discount rate.
Moreover, the Federal Reserve defines money according to its liquidity through two measures: M1 and M2 money supply. M1 includes very liquid forms of money, while M2 includes M1 plus less liquid forms such as savings and time deposits, certificates of deposits, and money market funds.