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Honors Economics Chapter 27 Money and the Banking System 1. What are the four functions that money serves? 2. How does the existence of money simplify the process of buying and selling? 3. What components of money do we count as part of M1? 4. What components of money do we count in M2? 5. If you take $100 out of your piggy bank and deposit it in your checking account, how did M1 change? Did M2 change? 6. Abank 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 Taccount balance sheet for the bank, with assets and liabilities, and calculate the bank's net worth. 7. 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 decides on a policy of holding 100% reserves. Draw a Taccount for the bank. b. 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 it has made its rst round of loans. 0. Assume that Humongous bank is part of a multibank system. How much will money supply increase with that original $19 million loan