Question

M1 is the narrowest definition of the money supply. It includes currency in circulation, checking account deposits and travelers checks. The statements refer to factors that can affect the money multiplier. Label each statement as true or false.

1. The total change in the M1 brought about by the money multiplier is affected by the amount of deposits made by households and businesses.
2. Banks must lend out all their excess reserves in order to change the M1 money supply.
3. The Federal Reserve (Fed) has very little effect on the money multiplier.
4. The state of the economy can affect the amount of excess reserves that banks keep on reserve, thereby affecting the impact of the money multiplier.

Answer 1

1 is true because Checkable Deposits is part of M1 money supply.

2 is false because bank lend out all excess not M1 money supply but m2 money supply.

3 is false because fereal reserve has big effect on Multiplier because they change reserve ratio according to economy situation

4 is true because bank keep as reserve its will impact on Multiplier because multiplier calcualted on the basis of reserve ratio.

Step-by-step explanation:

1. The formula for the simplified money multiplier is one divided by the required reserves (RR).

money multiplier=1 / RR

The total change in the M1 money supply is the money multiplier multiplied by excess reserves.

total change in the M1 money supply=(1 / RR)×(excess reserves)

If you deposit $100 cash into a checking account, M1 does not change because M1 includes both currency on hand and deposits in checking accounts. However, the amount of excess reserves available for banks to lend out does change. Therefore, the first statement is true. If more people keep their money in banks, then banks have more money to lend out in the form of excess reserves.

excess reserves = initial deposit - required reserves

2. It is up to the discretion of the banks to lend up to the maximum amount permissible by the Fed. It should be noted that when banks are not willing to lend out all excess reserves, the total change in the M1 money supply will be smaller.

3. Recall that the formula for the simplified money multiplier depends upon the reserve requirement. The Fed is in charge of maintaining the appropriate level of the reserve requirement.

4. During certain macroeconomic conditions such as recessions, banks might want to hold onto more of their excess reserves if they are worried about loan defaults. Alternatively, during an economic expansion, banks are more willing to make loans because of the good economic climate, so banks are more willing to loan out all their excess reserves.