QuestionAugust 10, 2025

The banking "system" can expand or contract M1 1) by a multiple of its excess reserves. 2) equal to its excess reserves. 3) equal to its required reserves. 4) none of the above.

The banking "system" can expand or contract M1 1) by a multiple of its excess reserves. 2) equal to its excess reserves. 3) equal to its required reserves. 4) none of the above.
The banking "system" can expand or contract M1 1) by a multiple of its excess reserves. 2) equal to its excess reserves. 3) equal to its required reserves. 4) none of the above.

Solution
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Answer

1) by a multiple of its excess reserves. Explanation 1. Identify the Concept The banking system can expand or contract M1 through the money multiplier effect, which is based on excess reserves. 2. Apply the Money Multiplier Formula **The money multiplier** is calculated as \frac{1}{\text{reserve ratio}} . This shows that the expansion of M1 is a multiple of its excess reserves.

Explanation

1. Identify the Concept<br /> The banking system can expand or contract M1 through the money multiplier effect, which is based on excess reserves.<br /><br />2. Apply the Money Multiplier Formula<br /> **The money multiplier** is calculated as $ \frac{1}{\text{reserve ratio}} $. This shows that the expansion of M1 is a multiple of its excess reserves.
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