6. The following values exist in an economy: L023.2 Circulating cash $200 Cash held by banks $50 Checking account balances $300 Savings accounts $600 Value of government bonds held by the public $150 Credit card debt $100 a. What is the value of M1 in this society? b. What is value of M2 in this society? 10. Jane brings into her bank $300 of cash to be deposited in her checking account. After all adjustment have been made the money supply increases by $2250. Assuming that the required reserve ratio is 10 percent, which of the following is true? L029.3, LO29.4, LO29.5 O a The money supply increase of $2250 is the maximum increase that could be expected. 0 b The maximum increase that could be expected is $3000; this increase is $750 below the maximum. 0 c This increase is above the maximum legal increase, so banks must have made new loans with values that exceeded that which is legally permitted. Q d The maximum increase in the money supply that could occur is $2700. Thus, in this case, banks may have kept some excess reserves. O 6 Jane must have taken back $150 of her initial deposit, reducing the reserves in the banking system by $150. 9. Charles withdraws $500 from his checking account. If the required reserve ratio is 10 percent, what is the maximum change (in absolute value) to demand deposits and the money supply for the entire banking system? L029.3, L029.4, L029.5 O 3 Demand Deposits $500 Money Supply $500 b Demand Deposits $500 Money Supply $0 C Demand Deposits -$5000 Money Supply -$4500 d Demand Deposits $5000 Money Supply $5000 0000 9 Demand Deposits +$5000 Money Supply +$4500 8. Assume the required reserve ratio is 20%, and Mary brings in $100 cash and deposits it in her checking account at Bank 2 which had no excess reserves. Answer the following questions. L029.3, L029.4, LO29.5 a. Initially by what amount does the money supply change? Explain. b. Does bank 2 now have excess reserves? If so, how much? c. By what amount can bank Z increase its loans? cl. Forthe entire banking system, what is the maximum change in each ofthe following? 1. Cash reserves by the banks 2. Loans 3. Demand deposits 4. Money supply e. What could prevent the banking system from having the maximum change in loans and demand deposits? 1. Explain the maximum effect of a discretionary cut in taxes of $40 billion on real GDP, when the economy's marginal propensity to consume is .75. How does this discretionary fiscal policy differ from a discretionary increase in government spending of $40 billion? LO27.1 6. Assume that the full-employment level of GDP is $10,000. The current level of GDP is $8,000. Answer the following questions. LO27.1, L027.3 a. Does this economy have any cyclical unemployment? Explain. b. lfthe MPC is .8, what minimum decrease in taxes is needed to reach full employment? c. lfthe MPC is .8, what minimum increase in government spending is needed to reach full employment? cl. Are your answers to questions b and c numerically identical? If not, explain why? 9. Could an equal increase in government spending and in taxes be used to reach full employment GDP? If so, what amount? 6. Explain how each of the following Fed actions will impact bank lending and the money supply. L030.3 a. The Fed raises the discount rate from 5 percent to 6 percent. b. The Fed raises the reserve ratio from 10 percent to 11 percent. (2. The Fed buys $400 million worth of Treasury bonds from commercial banks. d. The Fed lowers the interest rate on bank reserves at the Fed from 4 percent to 2 percent