ABBIX has a complex financial system with the following relationships: the ratio
ID: 2349893 • Letter: A
Question
ABBIX has a complex financial system with the following relationships: the ratio of required reserves to total deposits is 15 percent, 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 F. Now assume that currency held by the nonbank public, drops to 15 percent of checkable deposits and the ABBIX's target money supply is charged to $3.0 billion. What would the required reserves ratio have to be to reach the new target M1 money supply amount? Assume the other oringinal ratio relationships hold.Explanation / Answer
Answer to ABBIX Question is as follows: (a) m = (1 + k)/ [r(1+t+g) +k] m= (1 + .20)/[.15(1+.40 +.08) + .20) m= 1.2 / .422 m= 2.84 (b) Total deposits= 100/15 *(900 million) = $6000 million or $6 billion noncheckable deposits= 40/100=x/6billion = 100x=240billion = x = 2.4 billion checkable deposits = 6 billion - 2.4 billion = $3.6 billion currency held by public = 3.6 billion * 20% = $720 million MB=banking system reserves + currency held by public MB= $900 million + $720 million = $1.62 billion or $1,620 million M1 = MB * m = $1,620 million * 2.84 = $4.6008 billion (c ) m = ? When r = 10% and t = 30% m = (1+.20)/[.10(1 + .30 + .08) + .20] = 1.2/.338 = 3.55 (d) maximum amount of checkable deposits = 3.55 * $900 million = $3.195 billion Total deposits = 100/10*(9000 million) = $9 billion noncheckable deposits = 30/100 = x/9 billion => 100x = 270 billion => 270 billion/100 noncheckable deposits = $2.7 billion checkable deposits = 9 billion - 2.7 billion = $6.3 billion currency held by the public = 6.3 billion * 20%= $1.26 billion MB = 900 million + 1,260 million = $2.16 billion M1 = MB*m = 2.16 billion * 3.55 = $ 7.668 billion (e ) M1 = MB * m m = M1/MB = $2.8 billion/ $1.62 billion m = 1.73 (f) Currency held by public = $3.6 billion * 15% = $ 540 million MB = $900 million + $ 540 million = $1,440 million m = M1/MB m= $3 billion/ $1.44 billion m = 2.08