ABBIX has a complex financial system with the following relationships: The ratio
ID: 2677608 • Letter: A
Question
ABBIX has a complex financial system withthe 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.
a. Determine the M1 multiplier and the maximum dollar amount
of checkable deposits.
b. Determine the size of the M1 money supply.
c. What will happen to ABBIXs money multiplier if the reserve
requirement decreases to 10 percent while the ratio of
noncheckable deposits to checkable deposits falls to 30 percent?
Assume the other ratios remain as originally stated.
d. Based on the information in (c), estimate the maximum
dollar amount of checkable deposits, as well as the size of the
M1 money supply.
e. Assume that ABBIX has a target M1 money supply of
$2.8 billion. The only variable that you have direct control
over is the required reserves ratio. What would the required
reserves ratio have to be to reach the target M1 money supply
amount? Assume the other original ratio relationships hold.
f. Now assume that currency held by the nonbank public drops
to 15 percent of checkable deposits and that ABBIXs target
money supply is changed 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 original ratio relationships hold.
Explanation / Answer
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