M1 is the narrowest definition of the money supply. It includes currency in circulation, checking account deposits and travelers checks. The statements refer to factors that can affect the money multiplier. Label each statement as true or false. The total change in the M1 brought about by the money multiplier is affected by the amount of deposits made by households and businesses. Banks must lend out all their excess reserves in order to change the M1 money supply. The Federal Reserve (Fed) has very little effect on the money multiplier. The state of the economy can affect the amount of excess reserves that banks keep on reserve, thereby affecting the impact of the money multiplier.

Please refer to Explanation

Explanation:

The total change in the M1 brought about by the money multiplier is affected by the amount of deposits made by households and businesses. TRUE ✔️✔️✔️

Deposits made by businesses and households enable Banks to loan out money thereby increasing M1.

Banks must lend out all their excess reserves in order to change the M1 money supply. FALSE ❌❌.

Indeed not only do Banks not have to lend out all excess reserves to impact M1, most of the time they are not permitted by law to do so.

The Federal Reserve (Fed) has very little effect on the money multiplier. FALSE ❌❌.

As the Central Bank System of the United States, the FED can set Reserve Requirements that can reduce or increase the amount of money that Banks can loan out to people thereby having a direct influence on the Money Multiplier.

The state of the economy can affect the amount of excess reserves that banks keep on reserve, thereby affecting the impact of the money multiplier. TRUE ✔️✔️✔️.

Banks loan out money dependent on the state of the Economy. Central Banks such as the FED increase or reduce the Reserve Requirements for instance based on the state or the economy. When the Economy is at a Recession or a Depression, the FED usually lowers the rate so that Banks can loan more money out.

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