Question

If the required reserve ratio is 10 percent, currency in circulation is $1,200 billion, checkable deposits are $1,600 billion, and excess reserves total $2,500 billion, then the M1 money multiplier is _____.

a. 2.5.
b. 7.3.
c. 1.7.
d. 0.73.

Answer 1

Answer:

Option D.

Step-by-step explanation:

Given information:

Required reserve ratio (rr)= 10%= 0.1

Currency in circulation (C)= $1,200 billion

Checkable deposits (D)= $1,600 billion

Excess reserves total (ER)= $2,500 billion

The formula for the M1 money multiplier is

$M_1=\dfrac{1+\frac{C}{D}}{rr+\frac{ER}{D}+\frac{C}{D}}$

where, C is currency in circulation, D is deposits, ER is excess reserve and rr is required reserve ratio.

Substitute the given values in the above formula.

$M_1=\frac{\left(1+\frac{1200}{1600}\right)}{0.1+\frac{2500}{1600}+\frac{1200}{1600}}$

$M_1=\frac{\left(1+\frac{3}{4}\right)}{0.1+\frac{25}{16}+\frac{3}{4}}$

$M_1=0.7253886$

$M_1\approx 0.73$

The M1 money multiplier is 0.73. Therefore, the correct option is D.