Keith Porter: If the Federal Reserve wants to stimulate the economy, what would they do? Suppose that they want to change the money supply by 1.5 billion dollars. IF the required reserve ratio is 20% how does this information assist the Federal Reserve in changing the interest rate to achieve its policy goal?|||Jurij is absolute correct in expressing the textbook calculations. Good for getting it right on a paper. However, in practice, it doesn't quite work like that. First the text book example depends on the deposit multiplier (i.e. the loading of deposits, re-depositing and re-loaning) which can take time, perhaps one to two years to reach the maximum. Second, banks tend to keep reserves far in excess of the minimum reserves. For checking accounts, they maintain about 65-70% reserves. For saving accounts, it's more like 30%. So the actual multiplier tends to be much less than the theoretical maximum. So, in practice, if the Fed wanted to change the money supply by $1.5B now, they would inject something close to that right now, then monitor the money supply and take some back as the multiplier takes effect. In fact, the Fed has considered abandoning the legal minimum reserve and just going with a solvency test. In Canada, the central bank got rid of the minimum reserve requirement and no one noticed. But unless you're doing your economic doctoral thesis, go with Jurij answer.|||If required reserve ratio is 20% then money multiplier is=1/0.2=5 If planned MS increase should be +1.5 billions then Money increase should be 1.5/5=+0.3 billions It means that extra 0.3 billions should be injected into curculation. Tools may be different, change reserve requirements or purchase gov bonds, etc.