Final answer:
The money supply is $1.5 trillion, currency deposit ratio is 0.6667, excess reserve ratio is 0.0167, and the money multiplier is 12.5. Using this multiplier, the total change in the M1 money supply from $9 million in excess reserves would be $112.5 million.
Step-by-step explanation:
Calculating the money supply involves several key ratios and components within the banking system. In the given scenario, the money supply (M1) is determined by adding checkable deposits to currency in circulation. This yields a total money supply of $1.5 trillion ($900 billion in checkable deposits + $600 billion in currency).
Two important ratios are then considered: the currency deposit ratio and the excess reserve ratio. The currency deposit ratio is calculated by dividing currency in circulation by checkable deposits, resulting in a ratio of 0.6667. Simultaneously, the excess reserve ratio is obtained by dividing excess reserves by checkable deposits, yielding a ratio of 0.0167.
The money multiplier, which is the reciprocal of the required reserve ratio, is calculated as 1 / 0.08, resulting in a money multiplier of 12.5. This multiplier serves as a key factor in determining the total change in the M1 money supply.
In the subsequent example involving excess reserves of $9 million, the money multiplier is applied. The total change in the M1 money supply is calculated by multiplying the excess reserves by the money multiplier, resulting in an increase of $112.5 million.
Understanding these ratios and the money multiplier is crucial for comprehending the dynamics of the money supply, allowing economists and policymakers to assess the potential impact of changes in various financial parameters on the overall liquidity and stability of the economy.