Question

The money base (M0) is $200 and the required reserve ratio is 10%. All deposits are checking deposits.

a. If the public holds no currency and banks hold no excess reserves, what will M1 be?

200*10=2000

b. If the central bank buys another $200 worth of treasury securities, what will happen to M0 and M1?

This is what i think of doing here:

200/10%=2000

M0 is not changing

M1=> 2000 + 200 = 2200

M1 is increasing

Is this correct? Not sure if i am understanding it the right way

OR

Both M0 and M1 are decreasing up to 200$ and then it means that in question C it is required to increase the treasury securities

Please, help with figuring this out.

c. Assuming that banks hold no excess reserves, it is possible to achieve the same effect on M1 found in part b by changing the reserve requirement. What would they need to change it to? And please help with this question based on the previous one.

Answer 1