The second way that the Fed can influence the money supply is through changing the reserve requireme

The second way that the Fed can influence the money supply is through changing the reserve requireme

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The second way that the Fed can influence the money supply is through changing the  reserve requirements. This is a form of fiscal policy because the Fed is working with the  finances of banks to affect the money supply rather than with the money suppl y directly.  We learned in the section 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 multiplie r 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. This in turn repeats the cycle of loan to  deposit, resulting in an 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. This is also a form of fiscal policy because the Fed is working 
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