# Question: Challenge Problem ABBIX has a complex financial system with the

Challenge Problem ABBIX has a complex financial system with the following relationships: The ratio of required reserves to total deposits is 15 percent, and the ratio of noncheckable deposits to checkable deposits is 40 percent. In addition, currency held by the nonbank public amounts to 20 percent of checkable deposits. The ratio of government deposits to checkable deposits is 8 percent. Initial excess reserves are $900 million.

a. Determine the M1 multiplier and the maximum dollar amount of checkable deposits.

M1 multiplier

Checkable deposits

b. Determine the size of the M1 money supply.

M1 money supply

c. What will happen to ABBIX’s money multiplier if the reserve requirement decreases to 10 percent while the ratio of noncheckable deposits to checkable deposits falls to 30 percent? Assume the other ratios remain as originally stated.

Money multiplier

d. Based on the information in (c), estimate the maximum dollar amount of checkable deposits, as well as the size of the M1 money supply.

Checkable deposits

M1 money supply

e. Assume that ABBIX has a target M1 money supply of $2.8 billion. The only variable that you have direct control over is the required reserves ratio. What would the required reserves ratio have to be to reach the target M1 money supply amount? Assume the other original ratio relationships hold.

Required reserve ratio

f. Now assume that currency held by the nonbank public drops to 15 percent of checkable deposits and that ABBIX’s target money supply is changed to $3.0 billion. What would the required reserves ratio have to be to reach the new target M1 money supply amount? Assume the other original ratio relationships hold.

a. Determine the M1 multiplier and the maximum dollar amount of checkable deposits.

M1 multiplier

Checkable deposits

b. Determine the size of the M1 money supply.

M1 money supply

c. What will happen to ABBIX’s money multiplier if the reserve requirement decreases to 10 percent while the ratio of noncheckable deposits to checkable deposits falls to 30 percent? Assume the other ratios remain as originally stated.

Money multiplier

d. Based on the information in (c), estimate the maximum dollar amount of checkable deposits, as well as the size of the M1 money supply.

Checkable deposits

M1 money supply

e. Assume that ABBIX has a target M1 money supply of $2.8 billion. The only variable that you have direct control over is the required reserves ratio. What would the required reserves ratio have to be to reach the target M1 money supply amount? Assume the other original ratio relationships hold.

Required reserve ratio

f. Now assume that currency held by the nonbank public drops to 15 percent of checkable deposits and that ABBIX’s target money supply is changed to $3.0 billion. What would the required reserves ratio have to be to reach the new target M1 money supply amount? Assume the other original ratio relationships hold.

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