Assuming initially that r = 10%,c = 40%,and e = 0,an decrease in c to 30% causes the M1 money multiplier to ________,everything else held constant.

Question

Quizplus · Accepted Answer

The formula for M1 money multiplier is (1 + c)/(c + r + e), where c is the currency-to-deposit ratio, r is the required reserve ratio, and e is the excess reserve ratio. If c decreases from 40% to 30%, the currency-to-deposit ratio decreases, which means that more deposits are held in banks and fewer are held as currency. This increases the denominator of the M1 money multiplier formula (c + r + e), while keeping the numerator (1 + c) constant. Therefore, the M1 money multiplier increases from 2.8 to 3.25, which is choice A.

Assuming Initially That R = 10%,c = 40%,and E =