Question

If the required reserve ratio is 15 percent, currency in circulation is $400 billion, checkable deposits are $1000 billion, and excess reserves total $1 billion, then the M1 money multiplier is

Answer 1

If the required reserve ratio is 15 percent, currency in circulation is $400 billion, checkable deposits are $1000 billion, and excess reserves total $1 billion, then the M1 money multiplier is (A) 2.54.

What is Money Supply?

The interest rates depend on the money supply and money demand. Generally, the interest rate directly relates to money demand and has an inverse relationship with the money supply. M1 money supply includes currency in circulation and checkable deposits with bank.

Formula :

m 1 = 1 + ( C / D ) / [ r r + ( E R / D ) + ( C / D ) ]

Where:

C/D = currency ratio

ER/D = excess reserves ratio

So if :

Required reserve ratio (rr) = .15

Currency in circulation = $400 billion

Deposits = $1000 billion

Excess reserves = $1 billion

m 1 = 1 + ( 400 / 1000 ) / ( .15   +   ( 1 / 1000 ) + ( 400 / 1000 ) )

m 1 = 1.4 / ( .15 + .001+ .4 )

m 1 = 1.4 / .551

m 1 = 2.54

Therefore , we can conclude that the correct option is A.

Your question is incomplete, but most probably your full question was:

If the required reserve ratio is 15 percent, currency in circulation is $400 billion, checkable deposits are $1000 billion, and excess reserves total $1 billion, then the M1 money multiplier is

A) 2.54.

B) 2.67.

C) 2.35.

D) 0.551.

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