Question

If the required reserve ratio is 10%, actual reserves are $10 million, and currency in circulation is equal to $20 million, M1 will at most to be equal to a $150 million. b $20 million. c $90 million. d $30 million. e $120 million.

Answer 1

Answer:

The correct answer is E

Explanation:

M1, M2 and M3 are the terms which measure the money supply of United States, referred to as money aggregates.

The formula for computing the M1 is as:

M1 = coins as well as currency in circulation + checkable or demand deposit + traveler checks

where

Currency in circulation is $20 million

Demand deposit is as:

= Required reserve × Actual reserve

= 10 ×  $10 million

= $100 million

Putting the values above:

M1 = $20 million + $100 million

M1 = $120 million

Answer 2

The value of M1 should be option E. $120 million.

Calculation of the value of M1:

Since we know that

M1, M2 and M3 are the terms that measure the money supply.

The following formula should be used for computing the M1

M1 = coins as well as currency in circulation + checkable or demand deposit + traveler checks

here.

Currency in circulation is $20 million

Demand deposit is as:

= Required reserve × Actual reserve

= 10 ×  $10 million

= $100 million

Now the M1 is

M1 = $20 million + $100 million

M1 = $120 million

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