The Monetary System

Q1) You are going to use the following hypothetical financial information to measure the

money supply in the US in 2000.

Traveler's checks held by the public: $38 billion

Bills and coins in circulation: $615 billion

Bills and coins in vaults of commercial banks: $37 billion

Demand deposits: $905 billion

Savings deposits: $4 trillion

Government bonds held by the public: $218 billion

Government bonds held by the Federal Reserve Bank: $251 billion

Amounts owed on credit cards: $279 billion

Credit limits on credit cards: $514 billion

Small time deposits: $2,321 billion

Money market mutual funds: $2,956 billion

Using this information calculate M1 and M2. Some of the above information is not

used to calculate the money supply. Explain why.

M1 = Currency (bills and coins in circulation) + Demand deposits + traveler's

checks

M2 = M1 + Saving deposits + Small time deposits + Money market mutual funds

Q2) What are the options available to the Federal Reserve to increase the money supply? Explain how each works. How can the effectiveness of these policies be limited by the actions of banks and the public?

Q3) Suppose that First National Bank acquires $600,000 in new deposits and initially uses

part of this to make new loans of $400,000. The T-account of First National Bank,

showing changes in its assets and liabilities, is as follows:

Bank Balance Sheet

Assets Liabilities

Change in Reserves$200,000 Change in Deposits $600,000

Change in Loans$400,000

1. How much in excess reserves does First National nowhold, as a result of the changes listed above?
2. If FirstNational now decides to reduce its reserves to only the required amount, by howmuch will the economy's money supply increase?