Question

1. Suppose you withdraw $500 from your checking account at your bank, which has a required reserve ratio of 30%.

Initially, as a result of your this transaction, the size of M1 will.... (Increase/decrease/remain unchanged) . Before any further actions by your bank, the reserves in your bank..... Increase/decrease/remain unchanged) by...

while the excess reserves of your bank ..... (Increase/decrease/remain unchanged) by ....

2.

Suppose that the general public decided to decrease its holdings of currency and increase its checking deposits by an equal amount.

If the Federal Reserve does not take any offsetting action, banks will (Increase/decrease) their outstanding loans, thereby (shrinking/ growing) the money supply.

3. True or False: When you deposit currency in a checking account, cash goes out of circulation and the money supply declines.

4. An increase in the reserve requirement (Increase money supply/ decrease money supply)

A Purchase by the Fed of $100 million in U.S. securities from a commercial bank (Increase money supply/ decrease money supply)

Anyone can help me? Thanks!

Answer 1

1.

Initially, size of M1 will Remain unchanged. Before any further actions by your bank, the reserves in your bank decrease by $150 (= $500 x 30%) while the excess reserves of bank Decrease by $350 (= $500 - $150).

2.

Banks will Increase their outstanding loans, thereby growing the money supply.

3. False

Money supply (M1 or M2) includes both cash and checking account. So an equal increase in one of them and decrease in the other will not change M1 or M2.

4. Increase in reserve requirement will Decrease money supply.

5. Fed's purchase of securities will Increase money supply.