ABBIX has a complex financial system with the following relationships: The ratio
ID: 2704954 • 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.
Assume that ABBIX has a target M1 money supply $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.
Explanation / Answer
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 %