Introduction to Finance


a.  Determine the size of the M1 money multiplier and the size of  the money supply. b



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R.Miltcher - Introduction to Finance

a. 
Determine the size of the M1 money multiplier and the size of 
the money supply.
b. 
If the ratio of currency in circulation to checkable deposits were 
to drop to 13 percent while the other ratios remained the same, 
what would be the impact on the money supply?
c. 
If the ratio of government deposits to checkable deposits in-
creases to 10 percent while the other ratios remained the same, 
what would be the impact on the money supply?
d. 
What would happen to the money supply if the reserve require-
ment increased to 14 percent while noncheckable deposits to check-
able deposits fell to 35 percent? Assume the other ratios remain as 
originally stated.
11. 
Challenge Problem
ABBIX has a complex fi nancial 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.
c. 
What will happen to ABBIX’s 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 bil-
lion. 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 ABBIX’s 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.



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