Question 1

What aspect of the U.S. monetary system that is no longer in place limited the expansion of the money supply early in the Great Depression? Explain your answer.

Question 2

Write "M1" next to each of the following items that is part of the M1 money supply; write "M2" next to the items that are part of the M2 money supply.

1. Currency in circulation
2. Currency held by the Federal Reserve
3. Checkable deposits
4. Traveler's checks
5. Deposits in savings accounts
6. Time deposits under $100,000
7. Retail money market mutual funds
8. Stocks
9. Credit cards

Question 3

Suppose the Federal Reserve buys $4,000 worth of Treasury bonds from River Bank. Calculate the largest total increase in the money supply that could result if the reserve requirement is:

a.) 25%

b.) 20%

Question 4

Indicate whether an increase in each of the following would increase or decrease the total amount of money created when the Federal Reserve adds money into the economy by purchasing Treasury bonds from a commercial bank.

1. The amount of cash held by individuals
2. The size of the Federal Reserve bond purchase
3. The excess reserves held by banks
4. The reserve requirement

Question 5

Suppose the highest return you can receive on your money is a 6 percent rate of interest from your bank. That interest is paid in one lump sum at the end of each year for amounts deposited for the entire year. Which of the following options would provide you with the most money one year from now? Which option would provide you with the least money one year from now?

1. Receiving $100 today that you can deposit in your bank
2. Receiving $104 one year from now
3. Receiving $50 today that you can deposit, and $52 one year from now