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Unformatted text preview: The second way that the Fed can influence the money supply is through changing the reserve requirements. We learned on the purpose of banks that the money multiplier shows how much an initial deposit increases the money supply after loans are made and redeposited. Recall that the money multiplier is one over the reserve requirement. Thus, if the reserve requirement is decreased, banks are required to hold fewer reserves and can then make more loans. Th is in turn repeats the cycle of loan to deposit, resulting in a greater increase in the money supply. For a given initial deposit, a smaller reserve requirement will result in a larger money multiplier, and thus in a larger change in the money supply. The third way that the Fed can influence the money supply is through changing the federal funds interest rate. As we know, banks make deposits, withdrawals, and loans federal funds interest rate....
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This note was uploaded on 12/13/2011 for the course ECO 1310 taught by Professor Staff during the Fall '10 term at Texas State.
- Fall '10