Reading 24: Question about money multiplier

Hi, On page 369 of volume two, it states that Currency inreases by $930k and bank reserves increases by $70k when $1 million is increased in the monetary base. How are these numbers calculated? Thanks, and good luck with your studies.

Well, I don’t have the book but I’ll bet it says the reserve requirement is 7%.

Unfortunately not. =’(. It says r for M1 is 8% and r for M2 is 1%. Thus I totally don’t understand it.

Right, from what I understand: M = [(1+c)/(r+c)]B For M1 r=0.08 and c = 1.06 The money multiplier is 1.8 for M2 r=0.01 and c = 0.12 The money multiplier is 8.6 Therefore if the FED increases the money base by USD 1 million M1 will increase by USD 1.8m and M2 will increase by 8.6m From the equations that derive the “multiplier” equation: R = r.D (2) C = c.D (3) B = R + C (4) From these equations it becomes clear that the monetary base (and increases) will all be eventually distributed to either currency or reserves (equation 4) To find to proportions sub (2) and (3) into (4) B = r.D + c.D B = (r + c)D (5) Now: Rearrange (2): D = R/r and (3) D = C/c SUb these into (5) and rearrange: R = B[r/(r+c)] and C = B[c/(r+c)] From above use r=0.08 and c= 1.06 for M1 and R = USD 1,000,000 (0.08/(0.08+1.06) = 70,175.43 C = USD 1,000,000 (1.06/(0.08+1.06) = 929,824.56 (which are rounded to the nearest 1000 to give the answers in the book, note that they sum to USD 1,000,000: the increase in the monetary base)

Thanks very much!!!