Identify and describe the means by which the Fed can affect the money multi[plier.?

Question

How do changes in policy carry through to the economy?

Answer 1

The money multiplier is based on the reserve requirement ratio ,the amount of cash that individuals hold and the "excess" reserves of banks (due to self imposed safety reasons, or because demand for loans is low). The Fed can change the reserve requirement, which will affect the multiplier directly (lower requirement means a higher multiplier), play with the interest rate (through changes in discount rates) or conduct open market operations (basically taking money straight out of the economy by selling treasury bonds or notes, thus invalidating the multiplier altogether). Now, playing with rates is tricky. A higher rate will make people want to hold less cash (increasing the multiplier), but will make loans more expensive, so it could increase "excess" reserves depending on the strength of the economy (thus decreasing the multiplier effect). Thus, the bank has to take into account, not only the level of inflation, but where on the business cycle the country currently stands before deciding what to do.
Bear in mind, changes in reserve requirement ratios are not common, as they generate too much uncertainty.