Question

Assuming initially that rr = 15%, c = 40%, and e = 5%, an increase in e to 10% causes the M1 money multiplier to ________, everything else held constant. Can you please show all the math steps.

Answer 1

Initially,

rr = 15% or 0.15

c = 40% or 0.40

e = 5% or 0.05

Calculate the M1 money multiplier -

M1 money multiplier = (1+c)/(rr+e+c)

M1 money multiplier = (1+0.40)/(0.15 + 0.05 + 0.40) = (1.40)/(0.6) = 2.33

Now, e has increased to 10%.

Calculate the new M1 money multiplier -

New M1 money multiplier = (1+c)/(rr+e+c)

New M1 money multiplier = (1+0.40)/(0.15 + 0.10 + 0.40) = (1.40)/(0.65) = 2.15

Thus,

An increase in e to 10% cause the M1 money multiplier to decrease from 2.33 to 2.15.