1. The Federal Reserve makes the reserve requirement for all money received by t
ID: 1207091 • Letter: 1
Question
1. The Federal Reserve makes the reserve requirement for all money received by the bank to be 25%. What is the value of the simple deposit multiplier if this is the case? If Commerica Bank receives a $18,000 deposit from a customer, how much money will be added to the money supply (via checking accounts)? SHOW YOUR WORK
Using the table above, what is the money supply under the M1 definition? What is the money supply under the M2 definition?
Value Category Currency Savings Deposits Money Market Mutual Funds Checking Account Deposits Small Time Deposits $1,000 billion $6,300 billion $800 billion $1,100 biion $800 billionExplanation / Answer
(1) Multiplier = 1 / Reserve ratio = 1 / 0.25 = 4
Addition to money supply (increase) = $18,000 x Multiplier = $18,000 x 4 = $72,000
(2)
M1 = Currency + Checking account deposits = $(1000 + 1100) billion = $2100 billion
M2 = M1 + Savings deposits + Small time deposits + Money market mutual funds
= $(2100 + 6300 + 800 + 800) billion = $10,000 billion
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