Question

If currency outstanding equals $500 million, checkable deposits equal $2 billion, reserves equal $200 million, and the required reserve ratio is 0.10, find the value of the M1 money multiplier.

Answer 1

The M1 money multiplier is calculated as 1 divided by the required reserve ratio, which in this case is 0.10, giving a multiplier of 10. This indicates that each dollar of reserve supports 10 dollars of checkable deposits.

Step-by-step explanation:

The student is asking how to calculate the value of the M1 money multiplier given certain financial parameters such as currency outstanding, checkable deposits, reserves, and the required reserve ratio.

The M1 money multiplier can be calculated with the formula 1 divided by the required reserve ratio. In the scenario provided, the required reserve ratio is 0.10. Therefore, the M1 money multiplier is 1 divided by 0.10, which equals 10.

This multiplier signifies that every dollar of reserve can support 10 dollars of checkable deposits, influencing the total M1 money supply created in the banking system.