Question

Explain completely the mechanism through which a change in the following will change the money supply, M1.

A) an increase in c

B) an increase in rd

C) a decrease in e

D) an increase in the federal funds rate

Refer to following: M1 = (m) * [MB] = m * (MBn + BR)

Where,

m = [(1 + c)/(rd + c + e)]

And MB = MBn + BR

Where MB = Monetary base = C + R

C = Currency in Circulation

R = Bank Reserves

MBn = Non-borrowed Monetary Base

BR = Borrowed Reserves = Borrowed Reserves from the Federal Reserve System

m = money multiplier

c = C/D = currency ratio

rd = required reserve ratio against deposits

e = ER/D = Bank precautionary reserve ratio