Final answer:
The correct formula for calculating excess reserves is 'actual reserves - required reserves.' This calculation helps in determining the potential impact on the M1 money supply through the money multiplier effect, which is derived from the reserve requirement.
Step-by-step explanation:
The correct formula for calculating excess reserves is given by option B:
Excess reserves = actual reserves - required reserves
This formula allows a bank to determine how much of the total reserves exceeds the minimum amount required to be held by the bank, colloquially known as required reserves. To understand its implications on the broader economy, consider that if the excess reserves are $9 million, one can calculate the potential total change in the M1 money supply by using the money multiplier. This calculation is made by multiplying the money multiplier by the change in excess reserves, giving us an insight into the amount of M1 money supply created in the banking system due to reserve banking practices.
Reserve Requirement and M1 Money Supply
To determine the money multiplier, we use the reserve requirement, which is the mandatory minimum fraction of deposits that the banks are required to keep on hand as reserves. The formula for the money multiplier is 1 divided by the reserve ratio. This money multiplier is then used to calculate the total change in M1 money supply.