If the required reserve ratio is 0.1, the level of deposits is $1,000, the level of currency held by the public is $200 and the level of excess reserves is $100, then m₁ is _____.

Question

Quizplus · Accepted Answer

The money multiplier (m1) is calculated as 1 divided by the required reserve ratio. With a required reserve ratio of 0.1, the money multiplier is 1/0.1 = 10. However, considering the currency held by the public and excess reserves, the effective money multiplier is reduced. The formula for the money multiplier considering these factors is (1 + currency ratio) / (required reserve ratio + excess reserve ratio + currency ratio). Here, the currency ratio is 200/1000 = 0.2, and the excess reserve ratio is 100/1000 = 0.1. Therefore, m1 = (1 + 0.2) / (0.1 + 0.1 + 0.2) = 1.2 / 0.4 = 3.

If the Required Reserve Ratio Is 0