The required reserve ratio is 0.1, the level of deposits is $1,000, the level of currency held by the public is $500, and the level of excess reserves is $100. If the Fed increases the monetary base by $300, then M1 rises by approximately

Question

Quizplus · Accepted Answer

The increase in the monetary base will lead to an increase in excess reserves, which will then be used to increase loans and deposits. The increase in deposits will lead to an increase in M1. The multiplier effect is 1/(required reserve ratio), which is 1/0.1 = 10. Therefore, the increase in M1 will be 10 * $300 = $3,000. However, since the level of currency held by the public is $500, the increase in M1 will be $3,000 - $500 = $2,500. Since the level of excess reserves is $100, the increase in M1 will be $2,500 - $100 = $2,400. Therefore, the correct answer is C) $643.

The Required Reserve Ratio Is 0