If the required reserve ratio is 10 percent, currency in circulation is $1,200 billion, checkable deposits are $1,600 billion, and excess reserves total $2,500 billion, then the M1 money multiplier is _____.a. 2.5. b. 7.3. c. 1.7. d. 0.73.

Accepted Solution

Answer:Option D.Step-by-step explanation:Given information:Required reserve ratio (rr)= 10%= 0.1Currency in circulation (C)= $1,200 billionCheckable deposits (D)= $1,600 billionExcess reserves total (ER)= $2,500 billionThe formula for the M1 money multiplier is[tex]M_1=\dfrac{1+\frac{C}{D}}{rr+\frac{ER}{D}+\frac{C}{D}}[/tex]where, C is currency in circulation, D is deposits, ER is excess reserve and rr is required reserve ratio.Substitute the given values in the above formula.[tex]M_1=\frac{\left(1+\frac{1200}{1600}\right)}{0.1+\frac{2500}{1600}+\frac{1200}{1600}}[/tex][tex]M_1=\frac{\left(1+\frac{3}{4}\right)}{0.1+\frac{25}{16}+\frac{3}{4}}[/tex][tex]M_1=0.7253886[/tex][tex]M_1\approx 0.73[/tex]The M1 money multiplier is 0.73. Therefore, the correct option is D.