1. What determines whether a financial asset is included in the M1 money supply? Why are interest-earning checkable deposits included in M1, whereas interest-earning savings accounts and Treasury bills are not?
2. Why are banks able to maintain reserves that are only a fraction of the demand and savings deposits of their customers? Is your money safe in a bank? Why or why not?
3. How would the following influence the growth rates of the M1 and M2 money supply figures over time?
a. An increase in the quantity of U.S. currency held overseas.
b. A shift of funds from interest-earning checking deposits to money market mutual funds.
c. A reduction in the holdings of currency by the general public because debit cards have become more popular and widely accepted.
d. The shift of funds from money market mutual funds into stock and bond mutual funds because the fees to invest in the latter have declined.
4. Suppose that the reserve requirement is 10 percent and the balance sheet of the People's National Bank looks like the accompanying example.
a. What are the required reserves of People's National Bank? Does the bank have any excess reserves?
b. What is the maximum loan that the bank could extend?
c. Indicate how the bank's balance sheet would be altered if it extended this loan (show the new t-account).
d. Suppose that the required reserves were 20 percent. If this were the case, would the bank be in a position to extend any additional loans? Explain.
Assets Liabilities
Vault Cash $20,000 Checking deposits $200,000
Deposits at Fed $30,000 Net Worth $15,000
Securities $45,000
Loans $120,000