Question

Everything else held constant, an increase in the excess reserves ratio causes the m1 money multiplier to ________ and the money supply to ________.

Answer 1

The M1 money multiplier decreases and the money supply decreases when the required reserve ratio on checkable deposits rises, all else being equal.

What is the reserve ratio?

The percentage of deposits that commercial banks must retain in cash under the guidance of the central bank is known as the cash reserve ratio.

How is reserve ratio determined?

• The country's central bank, in the instance of the United States, the Federal Reserve, determines the reserve ratio requirement.
• The calculation for a bank can be obtained by dividing the bank deposits by the cash reserve held with the central bank, and it is expressed as a percentage.

What is an example of the reserve ratio?

The required reserve ratio is directly correlated to how much a bank expands the money supply. For instance, if a bank has deposits totaling $1,000,000 and a reserve ratio of 10%, it can lend out $900,000.

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