Ch.14 Money and Banking Problem 1 to 3 are adapted from Openstax Ch.14 problem 29 to 31.

1.(a) (2 points) If you take $100 out of your piggy bank and deposit it in your checking account, how did M1 change? Did M2 change? Assuming that there are no new loans created from the deposit. (Section 14.2)

(b) (2 points) Now assuming that the bank is subject to a minimum required reserve ratio of 20%, and the bank is going to use all the excess reserves to issue new loans, how much is the total change in money supply in the economy from the new loans issued? (Section 14.4) Hint: first calculate the money multiplier.

2.(2 points) A bank has deposits of $400. It holds reserves of $50. It has purchased government bonds worth $70. It has made loans of $500. Set up a T-account balance sheet for the bank, with assets and liabilities, and calculate the bank's net worth. (Section 14.3)

3.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.

1. (2 points) Humongous Bank decides on a policy of holding 100% reserves. Draw a T-account for the bank. (Section 14.3 and 14.4)

1. (2 points) Humongous Bank is required to hold 5% of its existing $20 million as required reserves, and to loan out all the excess reserves. Draw a T-account for the bank after it has made its first round of loans. (Section 14.3 and 14.4)

Ch.15 The Fed and Monetary Policy

Problem 4 and 5 are adapted from Openstax ch.15 review question 24 and problem 38.

4.Suppose the Fed conducts an open market purchase by buying $10 million in Treasury bonds from Acme Bank.

a.(2 points) Sketch out the balance sheet changes that will occur as Acme converts the bond sale proceeds to new loans. The initial Acme bank balance sheet contains the following information: Assets - reserves 30, bonds 50, and loans 250; Liabilities - deposits 300 and equity 30. (Section 15.3)

b.(2 points) Assume the required reserve ratio is 0.1 and other things stay the same, how much is the total change in money supply after the open market purchase of $10 million in Treasury bonds by the Fed? (Section 14.4 and 15.3)

5.( 2 points) What kind of monetary policy would you expect in response to high inflation: expansionary or contractionary? Why? (Section 15.4)