11. Challenge Problem ABBIX has a complex financial system with the following re

Question

11. Challenge Problem 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.

a. Determine the M1 multiplier and the maximum dollar amount

of checkable deposits.

b. Determine 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.

Calculating M1 Multiplier and M1 Money Supply Part A, B r Ratio of Reserves to total deposits 15% t Ratio of Non-checkable to checkable   deposits 40% k Ratio of Currency of non-banking   public to checkable deposits 20% g Ratio of Government deposits to   checkable deposits 8% Initial Reserves $900,000,000 M1 Money Multiplier 1.4 Excess Initial   Reserves 180,000,000.00 Maximum Dollar Amount   of Checkable Deposits 27,000,000.00 Amount of Currency M1 Money Supply 2,800,000,000.00 Calculating Required Reserves Ratio for a Target M1 Part E Ratio of Non-checkable to checkable   deposits 40% Ratio of Currency of non-banking   public to checkable deposits 20% Ratio of Government deposits to   checkable deposits 8% Initial Reserves $900,000,000.00 Target M1 Money Supply $2,800,000,000.00 Amount of Currency $0 Target Amount of Checkable Deposits Target Money Multiplier Required Ratio of Reserves to Total   Deposits

Explanation / Answer

a) Required Ratio (rr) 15% Ratio of non checkable deposits ( e) 40% Currency ratio ( c) 20% Deposits (D) $                900,000,000.00 Total Deposits $             6,000,000,000.00 M1 Multiplier = (1+c)/(rr+e+c) 1.6 Checkable deposits = (M1 Multiplier * D ) / rr $             9,600,000,000.00 b) M1 money Supply = Currency held outside banks+Checkable deposits $           10,800,000,000.00

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