Question

If the currency in circulation is $500 billion, the required reserve ratio is 5 percent, checkable deposits are $700 billion, and excess reserves total $10 billion, then the money multiplier for the M1 is

Answer 1

2.35

Step-by-step explanation:

The computation of the money multiplier for the M1 is shown below:

As we know that

Money supply(M1) = Currency in circulation + Checkable deposits

M1 money supply is = $500 billion + $700 billion

= $1,200 billion

Now the M1 money multiplier is

We know that

Money multiplier = Money supply ÷ Monetary base

where,

Monetary base = Currency in circulation + Bank excess reserves

= $500 billion + $10 billion

= $510 billion

We know that,

Money multiplier = Money supply ÷ Monetary base

= $1,200 ÷ $510

= 2.35