The questions on this homework deal with an economy called Economica. This econo
ID: 1208620 • Letter: T
Question
The questions on this homework deal with an economy called Economica. This economy contains a total of two banks; I've included partial balance sheet information for each below. To avoid each question becoming huge, I won't repeat this information for future questions.
Bank One:
$1,500 cash within the bank
$3,000 Deposit in the Fed
$6,000 equity (capital)
$12,000 saving deposits
$16,000 checking deposits (DD)
Bank Two:
$2,000 cash within the bank
$3,500 Deposit in the Fed
$8,000 equity (capital)
$15,000 savings deposits
$20,000 checking deposits (DD)
Residents in this economy hold $6,000 in cash. The reserve requirement ratio is the same as we've used on all graded assignments.
Calculate the money supply (M1) using the "simplified definition method." Assume the information given here is the only relevant information. Carefully follow all numeric instructions.
Explanation / Answer
M1 is a measure of the money supply that includes all physical money, such as coins and currency, as well as demand deposits, checking accounts and Negotiable Order of Withdrawal (NOW) accounts. M1 measures the most liquid components of the money supply, as it contains cash and assets that can quickly be converted to currency.
Bank One:-
M1 = Sum of following:-
cash within the bank $1,500
Deposit in the Fed +$3,000
saving deposits +$12,000
checking deposits (DD) +$16,000
Cash in hand + $6000 (given in ques that Residents in this economy hold $6,000 in cash)
= $38500
Similarly in Bank Two M1 =
cash within the bank $2,000
Deposit in the Fed +$3,500
savings deposits +$15,000
checking deposits (DD) +$20,000
Cash in hand + $6000 (given in ques that Residents in this economy hold $6,000 in cash)
= $ 46500
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