Question

Liabilities and Net Worth Assets Property Government bonds Vault cash Deposited in Federal Reserve accounts Loans Checking deposits $10 million $20 million $5 million $10 million $60 million Shareholder's equity $15 million $30 million TOTAL LIABILITIES TOTAL ASSETS $75 million $75 million PLUS SHAREHOLDER'S EQUITY

If this balance sheet depicts the only bank in the economy, how large is M1?
  
a-$5 million
b-$10 million  
c-$15 million  
d-$60 million  
e-$65 million

Given the balance sheet above and assuming a required reserve ratio of 20%, which of the following accurately describes the bank's situation?

a-it is failing to meet its reserve requirement  
b-it is just meeting its reserve requirement, but has no excess reserves  
c-it is meeting its reserve requirement, and has $5 million in excess reserves  
d-it is meeting its reserve requirement, and has $10 million in excess reserves  
e-it is meeting its reserve requirement, and has $15 million in excess reserves

How would an increase in the required reserve ratio affect banks' ability to create money?

a-banks will be able to create more money because of the decrease in excess reserves
b-banks will be able to create more money because of the increase in the money multiplier
c-it will have no effect on banks' ability to create money
d-it will reduce banks' ability to create money by forcing them to hold more reserves
e-it will reduce banks' ability to create money by increasing excess reserves

Answer 1

1) Solution: $60 million

Explanation: M1 includes checking accounts and demand deposits. Thus M1 = Demand deposits = $60 million

2) Solution: it is meeting its reserve requirement, and has $5 million in excess reserves

Explanation: Required reserve = 20% * $50 million = $10 million; Excess reserves = Deposited in Federal Reserve accounts - Required reserve = $15 million - $10 million = $5 million

3) Solution: it will reduce banks' ability to create money by forcing them to hold more reserves

Explanation: With an increase in reserve ration banks will be forced to hold more reserves thus will decrease banks' ability to create money