The Fed will be most effective at changing the money supply when:
A) banks have low reserves and the money multiplier is small.
B) banks have low reserves and the money multiplier is large.
C) banks have high reserves and the money multiplier is small.
D) banks have high reserves and the money multiplier is large.

Question

Quizplus · Accepted Answer

When banks have low reserves, they are more likely to lend out money, which increases the money supply. When the money multiplier is large, each dollar of reserves can create a larger amount of money, so the Fed can have a greater impact on the money supply.

The Fed Will Be Most Effective at Changing the Money