1. Explain why you think the Federal Reserve Bank tracks M1 and M2

2. Humongous Bank is the only bank in the economy. The people in this economy have $20 million in money, and they deposit all their money in Humongous Bank.

a. Humongous Bank is required to hold 5% of its existing $20 million as reserves, and to loan out the rest. Draw a T-account for the bank after this first round of loans has been made.

b. Assume that Humongous bank is part of a multibank system. How much will money supply increase with that original loan of $19 million (show your work)?

3. Suppose that consumers have a major change in their consumption/savings preferences. As a result of a serious recession they decide to consume less and save more. Illustrate a graph that shows how this would affect the demand and supply for borrowing money with credit.

4. Explain the difference between how you would characterize bank deposits and loans as assets and liabilities on your own personal balance sheet and how a bank would characterize deposits and loans as assets and liabilities on its balance sheet.

5. Explain what will happen to the money multiplier process if there is an increase in the reserve requirement?

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