MACRO ASSIGNMNT 2
Principles of Macroeconomics
Assignment 2
Q1 Answer the questions below using the following information:
All figures are in billions of dollars.
Currency held outside banks
$ 800
Demand Deposits 1000
Traveler's Checks 100
Other checkable deposits 200
Savings accounts 300
Money market accounts 100
Other near monies 200
a. What is the value of M1?
M1 = 800 + 1000 + 100 + 200 = $2100 billion.
b. What is the value of M2?
M2 = 2100 (M1) + 300 + 100 + 200 = $2700 billion.
Q#2 Explain what will happen to the size of both M1 and M2 in each of the following situations:
a) Jane, a millionaire, withdraws $500,000 from her money market account to buy a famous painting.
M1 stays the same and M2 decreases.
b) Paul transfers $10,000 from his NOW account to his savings account.
M1 decreases and M2 stays the same.
c) Sarah takes $5,000 out of her checking account to buy IBM stock
Both M1 and M2 decrease.
Q#3 The required reserve ratio is 10%. Dollar Bank has $50,000 in deposits and $10,000 in reserves. Assume all other commercial banks are loaned up.
a. What is the value of this bank's excess reserves?
Dollar Bank has $5,000 in excess reserves.
b. What is the value of the additional loans that can be made by the commercial banking system?
The commercial banking system can make additional loans of $50,000.
c. What is the money multiplier?
The money multiplier is 10.
d. How much in total deposits will be supported by Dollar Bank's reserves, if this bank lends all its excess reserves and there is no leakage from the banking system?
Deposits can be expanded by $100,000.
Q#4 Assume that a banking system starts from scratch with the following characteristics. The first bank has $100 in cash deposits which automatically count as reserves. The banking system has a required reserve ratio of 20% and all banks must lend out their excess reserves. Additionally, a check must be drawn in the full amount of the loan and deposited with another bank. Draw the
Assignment 2
Q1 Answer the questions below using the following information:
All figures are in billions of dollars.
Currency held outside banks
$ 800
Demand Deposits 1000
Traveler's Checks 100
Other checkable deposits 200
Savings accounts 300
Money market accounts 100
Other near monies 200
a. What is the value of M1?
M1 = 800 + 1000 + 100 + 200 = $2100 billion.
b. What is the value of M2?
M2 = 2100 (M1) + 300 + 100 + 200 = $2700 billion.
Q#2 Explain what will happen to the size of both M1 and M2 in each of the following situations:
a) Jane, a millionaire, withdraws $500,000 from her money market account to buy a famous painting.
M1 stays the same and M2 decreases.
b) Paul transfers $10,000 from his NOW account to his savings account.
M1 decreases and M2 stays the same.
c) Sarah takes $5,000 out of her checking account to buy IBM stock
Both M1 and M2 decrease.
Q#3 The required reserve ratio is 10%. Dollar Bank has $50,000 in deposits and $10,000 in reserves. Assume all other commercial banks are loaned up.
a. What is the value of this bank's excess reserves?
Dollar Bank has $5,000 in excess reserves.
b. What is the value of the additional loans that can be made by the commercial banking system?
The commercial banking system can make additional loans of $50,000.
c. What is the money multiplier?
The money multiplier is 10.
d. How much in total deposits will be supported by Dollar Bank's reserves, if this bank lends all its excess reserves and there is no leakage from the banking system?
Deposits can be expanded by $100,000.
Q#4 Assume that a banking system starts from scratch with the following characteristics. The first bank has $100 in cash deposits which automatically count as reserves. The banking system has a required reserve ratio of 20% and all banks must lend out their excess reserves. Additionally, a check must be drawn in the full amount of the loan and deposited with another bank. Draw the