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Problem ABBIX has a complex financial system withthe following relationships: Th

ID: 2681568 • Letter: P

Question

Problem 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.

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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