1. Explain why you think the Federal Reserve Bank tracks M1 and M2 2. Humongous Bank is the only bank in the economy. The people in this economy have $20 mil in money, and they deposit all their money in Humongous Bank. a. Humongous Bank is required to hold 5% of its existing $20 million as reserves, and to loan of the rest. Draw a T-account for the bank after this first round of loans has been made. b. Assume that Humongous bank is part of a multibank system. How much will money supply increase with that original loan of $19 million (show your work)? 3. Explain the difference between how you would characterize bank deposits and loans as asse and liabilities on your own personal balance sheet and how a bank would characterize deposits loans as assets and liabilities on its balance sheet. 4. Explain what will happen to the money multiplier process if there is an increase in the reserv requirement?
1. Explain why you think the Federal Reserve Bank tracks M1 and M2 2. Humongous Bank is the only bank in the economy. The people in this economy have $20 mil in money, and they deposit all their money in Humongous Bank. a. Humongous Bank is required to hold 5% of its existing $20 million as reserves, and to loan of the rest. Draw a T-account for the bank after this first round of loans has been made. b. Assume that Humongous bank is part of a multibank system. How much will money supply increase with that original loan of $19 million (show your work)? 3. Explain the difference between how you would characterize bank deposits and loans as asse and liabilities on your own personal balance sheet and how a bank would characterize deposits loans as assets and liabilities on its balance sheet. 4. Explain what will happen to the money multiplier process if there is an increase in the reserv requirement?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:1. Explain why you think the Federal Reserve Bank tracks M1 and M2
2. 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.
a. Humongous Bank is required to hold 5% of its existing $20 million as reserves, and to loan out
the rest. Draw a T-account for the bank after this first round of loans has been made.
b. Assume that Humongous bank is part of a multibank system. How much will money supply
increase with that original loan of $19 million (show your work)?
3. Explain the difference between how you would characterize bank deposits and loans as assets
and liabilities on your own personal balance sheet and how a bank would characterize deposits and
loans as assets and liabilities on its balance sheet.
4. Explain what will happen to the money multiplier process if there is an increase in the reserve
requirement?
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