Suppose that in a country, there are only two banks, Bank A and Bank B. The file HW4 Bank Balance Sheets shows their balance sheets. Here are some simplifying assumptions to make our lives a bit more bearable:

1. The country uses dollars as its unit of accounts.
2. There are no travelers' checks.
3. There are no fancy accounts in this country like money market mutual funds deposits.
4. Other deposits consist of saving deposits by households as well small denomination (less than $100,000) time deposits.
5. The amount of currency held by the non-bank public is $25,000.
6. All the reserves are held at the central bank. They also call their central bank "the Fed".
7. The required reserve ratio is 10 percent.

We concluded that excess reserves held by Bank A = 50000 and by B = 0.

Also, M1=275000 and M2=2215000.

1. If Bank A lends $50,000 to Anna through crediting her checking account (same as demand deposit) by $50,000. After this loan is made and before Anna spends it, what are M1 and M2 money supply equals to?

2. If Anna uses that $50,000 to buy herself a nice little piece of land in the countryside. Anna pays for this land by writing a check on her checking account at Bank A and giving it to the seller of the land. The seller deposits the check-in his savings account at Bank B. After this transaction, the M1 and M2 money supply equal to?

3. After Anna pays for the land and after the inter-bank transactions are completed, what are the amount of Bank A and B reserves at the Fed equal to?

Assets Uses of Funds Bank A Balance Sheet Liabilities + Net Worth Sources of Funds $65,000 Demand Deposits Other Deposits Reserves $150,000 $1,000,000 Treasury Bonds $85,000 Borrowing From the Fed From Fed Funds Market $50,000 $100,000 Loans Total $1,350,000 Net Worth $1,500,000 Total $200,000 $1,500,000 Assets Uses of Funds Bank B Balance Sheet Liabilities + Net Worth Sources of Funds $10,000 Demand Deposits Other Deposits Reserves $100,000 $940,000 Treasury Bonds $35,000 Borrowing From the Fed From Fed Funds Market $0 $30,000 Loans Total $1,255,000 Net Worth $1,300,000 Total $230,000 $1,300,000 Assets Uses of Funds Bank A Balance Sheet Liabilities + Net Worth Sources of Funds $65,000 Demand Deposits Other Deposits Reserves $150,000 $1,000,000 Treasury Bonds $85,000 Borrowing From the Fed From Fed Funds Market $50,000 $100,000 Loans Total $1,350,000 Net Worth $1,500,000 Total $200,000 $1,500,000 Assets Uses of Funds Bank B Balance Sheet Liabilities + Net Worth Sources of Funds $10,000 Demand Deposits Other Deposits Reserves $100,000 $940,000 Treasury Bonds $35,000 Borrowing From the Fed From Fed Funds Market $0 $30,000 Loans Total $1,255,000 Net Worth $1,300,000 Total $230,000 $1,300,000