ABBIX has a complex financial system with the following relationships: The ratio

Question

ABBIX has a complex financial system with the following relationships: The ratio of required reserves to total deposits is 15 percents, and the ratio of noncheckable deposits to checkable deposits is 40 percent. In addition , currency held by the nonbank public amounts to 20 percent of checkable deposits. The ratio of government deposits to checkable deposits is 8 percent. Initial excess reserves are $900 million. A. Determine the M1 multiplier and the maximum dollar amount of checkable deposits. B. Determine the size of the M1 money supply

Explanation / Answer

a. M1 multiplier= (1+CD)/(RR+CD)= (1+.4)/(.15+.4)= 2.5455 The ratio of required reserves to total deposits is 15 percent. Initial excess reserves are $900 million. Total deposits = (100/15)*$900 million = $6000 million = $6 billion ABBIX has a target M1 money supply $2.8 billion the required reserves ratio = ($2.8 billion/$6 billion)*100 = 46.67 %

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