Question

The U.S. money supply (M1)  at the beginning of 2015 was? $2,683.3 billion broken down as? follows: $1,165.7 billion in? currency, $3.5 billion in? traveler's checks, and? $1,514.1 billion in checking deposits.

Suppose the Fed decided to increase the money supply by decreasing the reserve requirement from 10 percent to 9 percent. Assume all banks were initially loaned up? (had no excess? reserves) and the quantity of currency and? traveler's checks held outside of banks did not change.

How large a change in the money supply would have resulted from the change in the reserve? requirement?

The money supply would change by ?$_________ billion. ?(Round your response to two decimal places and include a minus sign if necessary.?)

Answer 1

Checking deposits = $1,514.1 billion

Reserve requirement = 10% or 0.10

Required reserves = $1,514.1 billion * 0.10 = $151.41 billion

Now, reserve requirement has decreased to 9%

New required reserves = $1,514.1 billion * 0.09 = $136.27 billion

Excess reserves created = Old required reserves - new required reserves

Excess reserves created = $151.41 billion - $136.27 billion = $15.14 billion

The excess reserves created is $15.14 billion

Calculate the new money multiplier -

New money multiplier = 1/New reserve requirement = 1/0.09 = 11.11

The new money multiplier is 11.11

Calculate the change in money supply -

Change in money supply = Excess reserves created * New money multiplier

Change in money supply = $15.14 billion * 11.11 = $168.21 billion

Thus,

The money supply would change by $168.21 billion.