Challenge Problem ABBIX has a complex financial system with the following relati

Question

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.

c. What will happen to ABBIX

Explanation / Answer

Given this definition: we have r = 0.15, k = 0.2, t = 0.4 and g = 0.08

M1 multiplier = (1+0.2)/[0.15*(1+0.4+0.08)+0.2]=2.8436

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