Module 6 Ch.14 Money and Banking

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

1. (a)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) 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)

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