Question

1.     Base your answers on the Excel spread sheet that I attached to assignment 5. Calculations based on two decimal places and eleven iterations of the loan-deposit-reserve process. When the initial open market purchase is $500 and the reserve requirement is 10%, M1 increases by $5,000. (allow for a discrepancy of + or - $100 between your answer and my answer)

True

False

Answer 1

This is true.

M1 is the supply of money in the market through bank deposit, currency, etc. It depends on money multiplier as below:

Money multiplier = 1 / reserve ratio

                              = 1 / 0.10

                              = 10

Now this multiplier should be multiplied by the amount of market purchase (bank deposit) to get the quantum of M1.

Increase in M1 = Money multiplier × Market purchase

                        = 10 × 500

                        = $5,000