If the required reserve ratio is 0.2, the level of deposits is $2,000, the level of currency held by the public is $200 and the level of excess reserves is $200, then m₁ is

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Quizplus · Accepted Answer

The money multiplier (m1) is calculated as 1 / (required reserve ratio + currency ratio + excess reserve ratio). Here, the currency ratio is 200/2000 = 0.1 and the excess reserve ratio is 200/2000 = 0.1. Thus, m1 = 1 / (0.2 + 0.1 + 0.1) = 1 / 0.4 = 2.5.

If the Required Reserve Ratio Is 0