1. Identify whether the following items are counted in M1 only, M2 only, both M1
ID: 1108214 • Letter: 1
Question
1. Identify whether the following items are counted in M1 only, M2 only, both M1 and M2, or neither: A) A $1,000 balance in a checking account at a mutual savings bank B) A $100,000 (large) certificate of deposit issued by a New York bank. C) A $10,000 time deposit an elderly widow holds at her credit union. D) A $50 traveler's check E) A $50,000 money market deposit account balance 2. Suppose Bob digs up a box in his front yard that contains $1000. A) Would anything happen to the money supply (M1)? Explain B) What would happen to the money supply when Bob deposits this in a bank (reserve-deposit ratio is .05)? What is the maximum amount of money that can be created? How does this occur? 3. A month later, Bob buys a $1000 government bond from the Fed with this money. A) What happens to the money supply (M1)? Does it increase or decrease? By how much? B) How would this impact Bob's future spending? Would it increase or decrease? C) Under what circumstances would Bob be likely to buy bonds ? (what are the differences in stocks and bonds?, why would one choose bonds over stocks?) 1. Identify whether the following items are counted in M1 only, M2 only, both M1 and M2, or neither: A) A $1,000 balance in a checking account at a mutual savings bank B) A $100,000 (large) certificate of deposit issued by a New York bank. C) A $10,000 time deposit an elderly widow holds at her credit union. D) A $50 traveler's check E) A $50,000 money market deposit account balance 2. Suppose Bob digs up a box in his front yard that contains $1000. A) Would anything happen to the money supply (M1)? Explain B) What would happen to the money supply when Bob deposits this in a bank (reserve-deposit ratio is .05)? What is the maximum amount of money that can be created? How does this occur? 3. A month later, Bob buys a $1000 government bond from the Fed with this money. A) What happens to the money supply (M1)? Does it increase or decrease? By how much? B) How would this impact Bob's future spending? Would it increase or decrease? C) Under what circumstances would Bob be likely to buy bonds ? (what are the differences in stocks and bonds?, why would one choose bonds over stocks?) 1. Identify whether the following items are counted in M1 only, M2 only, both M1 and M2, or neither: A) A $1,000 balance in a checking account at a mutual savings bank B) A $100,000 (large) certificate of deposit issued by a New York bank. C) A $10,000 time deposit an elderly widow holds at her credit union. D) A $50 traveler's check E) A $50,000 money market deposit account balance 2. Suppose Bob digs up a box in his front yard that contains $1000. A) Would anything happen to the money supply (M1)? Explain B) What would happen to the money supply when Bob deposits this in a bank (reserve-deposit ratio is .05)? What is the maximum amount of money that can be created? How does this occur? 3. A month later, Bob buys a $1000 government bond from the Fed with this money. A) What happens to the money supply (M1)? Does it increase or decrease? By how much? B) How would this impact Bob's future spending? Would it increase or decrease? C) Under what circumstances would Bob be likely to buy bonds ? (what are the differences in stocks and bonds?, why would one choose bonds over stocks?)Explanation / Answer
1. A) Both B)Neither C)M2 D)Both E) Neither
2) A) Nothing happens to the money supply
B) Money Multiplier= 1/r = 1/0.05 = 20. After depositing it in a bank, the maximum the money supply will increase is $20000. This happens after repeated loans and deposits by individuals in the bank.
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