Assuming initially that the required reserve ratio = 10%,the currency-deposit ratio = 40%,and the excess reserve ratio = 0,an decrease in the currency-deposit ratio to 30% causes the M1 money multiplier to ________,everything else held constant.

Question

Quizplus · Accepted Answer

The M1 money multiplier formula is 1/required reserve ratio x (1 + excess reserve ratio)/(currency-deposit ratio). If the currency-deposit ratio decreases from 40% to 30%, then the denominator of the formula will decrease, which means the M1 money multiplier will increase. Using the initial values, the M1 money multiplier is 1/0.1 x (1 + 0)/(0.4) = 2.5. If the currency-deposit ratio decreases to 30%, then the new M1 money multiplier is 1/0.1 x (1 + 0)/(0.3) = 3.33. Therefore, the M1 money multiplier increases from 2.5 to 3.33, which is seen in choice A.

Assuming Initially That the Required Reserve Ratio = 10%,the Currency-Deposit