Consider an economy with multiple banks. Customers deposited $600
 billion in cash in banks. As a result, the M1 money supply increased by $2,785
 billion.

Calculate the reserve requirement set by the central bank for commercial banks if all excess reserves are loaned out. Round your answer to one decimal place if necessary.


To calculate the reserve requirement set by the central bank, we can use the formula related to the money multiplier and the reserve requirement:

\[
\text{Money Multiplier} = \frac{1}{\text{Reserve Requirement}}
\]

The money multiplier can also be expressed as:

\[
\text{Money Multiplier} = \frac{\text{Change in Money Supply (M1)}}{\text{Initial Deposits}}
\]

Given:
- Initial deposits = $ 600 \text{ billion} $
- Change in M1 money supply = $ 2,785 \text{ billion} $

We can first find the money multiplier by dividing the change in the M1 money supply by the initial deposits:

\[
\text{Money Multiplier} = \frac{2785}{600}
\]

Next, we can calculate the reserve requirement using the formula:

\[
\text{Reserve Requirement} = \frac{1}{\text{Money Multiplier}}
\]

Let's calculate the reserve requirement.The reserve requirement set by the central bank is approximately **21.5%**.

Do you have any questions or would you like further details on this calculation?

Here are 5 related questions that build on this concept:
1. What would happen if the reserve requirement was lowered to 15%?
2. How does the money multiplier affect the overall economy?
3. What impact would an increase in initial deposits have on the M1 money supply?
4. Can reserve requirements influence inflation? How?
5. How would changes in loan default rates impact the reserve requirement?

**Tip:** The reserve requirement is a tool central banks use to control the money supply and liquidity in the economy.

Consider an economy with multiple banks. Customers deposited $600 billion in cash in banks. As a result, the M1 money supply increased by $2,785 billion. Calculate the reserve requirement set by the central bank for commercial banks if all excess reserves are loaned out. Round your answer to one decimal place if necessary.

Explore how to calculate the reserve requirement set by the central bank in an economy where $600 billion is deposited in banks and the M1 money supply increases by $2,785 billion. This problem covers key economic concepts such as the money multiplier and reserve requirements.

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