Question: 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 decides on a policy of holding 100% reserves. Draw a T-account for the bank.
b. 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.
c. Assume that Humongous bank is part of a multibank system. How much will money supply increase with that original loan of $19 million?