Question

The U.S. money supply (M1) at the beginning of 2015 was​ $2,683.3 billion broken down as​ follows: $1,165.7 billion in​ currency, $3.5 billion in​ traveler's checks, and​ $1,514.1 billion in checking deposits. Suppose the Fed decided to increase the money supply by decreasing the reserve requirement from 11 percent to 10 percent. Assume all banks were initially loaned up​ (had no excess​ reserves) and the quantity of currency and​ traveler's checks held outside of banks did not change. How large a change in the money supply would have resulted from the change in the reserve​ requirement? The money supply would change by ​$ nothing billion. ​(Round your response to two decimal places and include a minus sign if necessary.​)

Answer 1

The money supply would change by $168.21 billion.

Step-by-step explanation:

Checking deposits = $1,514.1 billion

Reserve requirement = 10% or 0.10

Required reserves = $1,514.1 billion * 0.10 = $151.41 billion

Now, reserve requirement has decreased to 9%

New required reserves = $1,514.1 billion * 0.09 = $136.27 billion

Excess reserves created = Old required reserves - new required reserves

Excess reserves created = $151.41 billion - $136.27 billion = $15.14 billion

The excess reserves created is $15.14 billion

Calculate the new money multiplier -

New money multiplier = 1/New reserve requirement = 1/0.09 = 11.11

The new money multiplier is 11.11

Calculate the change in money supply -

Change in money supply = Excess reserves created * New money multiplier

Change in money supply = $15.14 billion * 11.11 = $168.21 billion

Thus,

The money supply would change by $168.21 billion.