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 0.73.
Information disclosed:
Required reserve ratio (rr) equals 10%, or 0.1.
Circulating money (C) equals $1,200 billion
Deposits (D) = $1,600 billion for checks.
Total excess reserves (ER) equals $2,500 billion.
The M1 money multiplier's formula is
M1= (1+C/D)/ (rr+ER/D+C/D)
where rr is the required reserve ratio, C is the amount of currency in circulation, D are deposits, ER are excess reserves, and
Replace the specified values in the formula above.
M1 = (1+1200/1600) / (0.1+2500/1600+1200/1600)
M1 = 0.7253886
M1 ≈ 0.73.
0.73 is the M1 money multiplier.
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