Use the information below to answer the following question.
Fact 8.1.1
The information describes a banking system.All banks are holding their desired reserves.

-Refer to Fact 8.1.1.The quantity of money as measured by M1 is equal to
A)$1,500.
B)$6,500.
C)$6,000.
D)$2,500.
E)$7,000.

Question

Use the information below to answer the following question.
Fact 8.1.1
The information describes a banking system.All banks are holding their desired reserves.
 
-Refer to Fact 8.1.1.The quantity of money as measured by M1 is equal to
A)$1,500. 
B)$6,500. 
C)$6,000. 
D)$2,500. 
E)$7,000.

Quizplus · Accepted Answer

Since all banks are holding their desired reserves, we can use the simple money multiplier formula to find the quantity of money in the system. The formula is M = 1/RR x ER, where M is the quantity of money, RR is the required reserve ratio, and ER is the amount of excess reserves. In this case, since all banks are holding their desired reserves, there are no excess reserves and ER = 0. Therefore, M = 1/RR x 0 = 0. Since M1 includes currency in circulation and demand deposits in banks, we know that the amount of currency in circulation is $1,500 and the amount of demand deposits is $4,500. Therefore, M1 = $1,500 + $4,500 = $6,000.

Use the Information Below to Answer the Following Question