Question

What is the maximum extent that the money supply changes when the Federal Reserve instigates a monetary policy action?

Answer 1

The maximum extent that money supply changes when federal reserves instigates a monetary policy action depends upon the money multiplier.

Money multiplier = 1/ reserve ratio

In fact, the extent of change in money supply depends upon the reserve ratio. Lower the reserve ratio, higher the money multiplier and higher money supply. Higher the reserve ratio, lower the money multiplier and lower will be the supply of money. The money supply changes with a multiplier effect.

Thus, the maximum change in money supply can be predicted using the multiplier.