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

Option D.

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=(1+(C)/(D))/(rr+(ER)/(D)+(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=(\left(1+(1200)/(1600)\right))/(0.1+(2500)/(1600)+(1200)/(1600))`

`M_1=(\left(1+(3)/(4)\right))/(0.1+(25)/(16)+(3)/(4))`

`M_1=0.7253886`

`M_1\approx 0.73`

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