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Step 1. In the case of Singleton Bank, for whom the reserve requirement is 10% (or 0.10), the money multiplier is 1 divided by .10, which is equal to 10. Step 2. We have identified that the excess reserves are $9 million, so, using the formula we can determine the total change in the M1 money supply:
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1,000. 0. 1. 1. Once you have m, plug it into the formula ΔMS = m × ΔMB. So if m 1 = 2.6316 and the monetary base increases by $100,000, the money supply will increase by $263,160. If m 1 = 4.5 and MB decreases by $1 million, the money supply will decrease by $4.5 million, and so forth. Practice this in Exercise 2.
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Once you have m, plug it into the formula ΔMS = m × ΔMB. So if m1 = 2.6316 and the monetary base increases by $100,000, the money supply will increase by $263,160. If m1 = 4.5 and MB decreases by $1 million, the money supply will decrease by $4.5 million, and so forth. Practice this in Exercise 2.+. 3.
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In the fiscal policy multiplier formula (8), the coefficient multiplying the change in the deficit is. m pcd /(1 − m pcd ) = (9/10)/(1 − 9/10) = 9, so an increase in the government deficit of only one dollar would raise consumption by nine dollars, a large amount. However, the increase in the deficit is small: as national income rises.
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