Question 1

For each of the following transactions, what is the initial effect (increase or decrease) on M1? On M2?

a.You sell a few shares of stock and put the proceeds into your savings account.

b.You sell a few shares of stock and put the proceeds into your checking account.

c.You transfer money from your savings account to your checking account.

d.You discover a quarter under the floor mat in your car and deposit it in your checking account.

e.You discover a quarter under the floor mat in your car and deposit it in your savings account.

Question 2

Bill withdraws $300 from his checking account at the local bank and keeps in his wallet.

a.How will the withdrawal change the T-account of the local bank?

b.If the bank maintains a reserve ratio of 10%, how will it respond to the withdrawal? Assume that the bank responds to insufficient reserves

by reducing the amount of deposits it holds until its level of reserves satisfies its required reserve ratio. The bank reduces its depos

its by calling in some of its loans, forcing borrowers to pay back these loans by taking cash from their checking deposits (at the same bank) to make repayment.

c.If every time the bank decreases its loans, checkable bank deposits fall by the amount of the loan, by how much will the money supply in the economy contract in response to Bill's withdrawal of $300?

d.If every time the bank decreases its loans, checkable deposits fall by the amount of the loan and the bank maintains a reserve ratio of 20%, by how much will the money supply contract in response to a withdrawal of $300?