A change in the reserve requirement is the tool used least often by the Fed because it:
A) Does not affect bank reserves.
B) Can cause abrupt changes in the money supply.
C) Does not affect the money multiplier.
D) Has no impact on the lending capacity of the banking system.

Question

Quizplus · Accepted Answer

Changing the reserve requirement can cause abrupt changes in the money supply, potentially destabilizing the economy. Therefore, the Fed uses this tool least often and relies more on tools like open market operations and the discount rate to adjust the money supply. The other choices are incorrect because changing the reserve requirement does affect bank reserves, the money multiplier, and the lending capacity of the banking system.

A Change in the Reserve Requirement Is the Tool Used