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,  then the m1 money multiplier is: 2.54.

Money multiplier

Given:

Required reserve ratio (rr) = .15

Currency in circulation = $400 billion

Deposits = $1000 billion

Excess reserves = $1 billion

Using this formula

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

Where:

C/D = currency ratio

ER/D = excess reserves ratio

Let plug in the formula

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 If the required reserve ratio is 15 percent, currency in circulation is $400 billion,  then the m1 money multiplier is: 2.52.

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