Final answer:
The total change in the M1 money supply, given a $2 million increase in reserves and an 8 percent required reserve ratio, is calculated using the money multiplier, which yields a $25 million increase in the money supply.
Step-by-step explanation:
When the required reserve ratio is 8 percent and reserves increase by $2 million, we first need to calculate the change in excess reserves, which in this case equals the increase in reserves because the increase is not being used to meet the ratio requirements. The money multiplier, which is the reciprocal of the reserve ratio (1/0.08), will be 12.5. To find the total change in the M1 money supply, we multiply the change in excess reserves by the money multiplier.
Here's the calculation:
- Change in reserves: $2,000,000
- Required reserve ratio: 8% (0.08)
- Money multiplier: 1 / 0.08 = 12.5
- Total change in the M1 money supply = Change in excess reserves x Money multiplier = $2,000,000 x 12.5 = $25,000,000