On the other hand, an entire banking system can loan out and add to the money supply by a multiple ofwhat it has as excess reserves. This is because when loans are made, many of these funds find their way back onto the banking system by being deposited into other banks. These other banks can re-loan out a fraction of these funds (that fraction which is not held as required reserves). The process continues giving rise to a multiple increase in the money supply. To calculate the extent to which the money supply increases, one needs to multiply the initial amount of excess reserves in the banking system by the money multiplier. The money multiplier equals the reciprocal of the required reserve ratio.PTS:1DIF:ChallengingNAT:BUSPROG: AnalyticTOP:How a Single Bank Creates MoneyKEY:Bloom’s: Analysis2.Describe the three basic tools used by the Fed to change the money supply. Which of these tools is most relied on in practice? Least relied on? Why?3.How can the Fed increase the money supply? How can the Fed decrease the money supply? Be specific.