Chap 26
Chap 26
Chap 26
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236 CHAPTER 10<br />
Answers to the Problems<br />
1. Of the list, money in the United States includes the quarters inside public telephones and the U.S.<br />
dollar bills in your wallet.<br />
Money is composed of currency outside the banks and deposits at financial institutions. Currency<br />
inside the cash machines, Visa cards, checks, and loans are not money.<br />
2. Of the list, money in the United States includes the checking deposits at Citicorp, the Susan B.<br />
Anthony dollar coin, and NOW accounts. The checking deposits at Citicorp and the NOW<br />
accounts are deposit money.<br />
The three money assets meet all the functions of money. IBM stock and U.S. government securities<br />
are not money. While IBM stock and U.S. Treasury securities are stores of value, they are definitely<br />
not a mediums of exchange and so are not money.<br />
3. M1 increases by $1,000; M2 does not change.<br />
M1 is the sum of currency outside the banks, traveler’s checks, and checking deposits. M2 is the sum<br />
of M1 plus savings deposits, time deposits, and money market mutual funds and other deposits. The<br />
withdrawal of $1,000 from a savings account leaves M2 unchanged because the $1,000 goes into M1<br />
types of money, which is part of M2. The $50 held as cash and the $950 held in a checking account<br />
increase M1 by $1,000.<br />
4. M1 does not change; M2 does not change.<br />
M1 is the sum of currency outside the banks, traveler’s checks, and checking deposits. The $10,000<br />
when it was kept in the savings account was not part of M1 and when it is put into a money market<br />
fund it still is not part of M1. So M1 does not change. M2 is the sum of M1 plus savings deposits,<br />
time deposits, and money market mutual funds and other deposits. When kept in the savings<br />
account, the $10,000 was part of M2. And, when put in the money market mutual fund, the<br />
$10,000 remains part of M2. So M2 does not change.<br />
5 a. The balance sheet has the following assets: Reserves, $250 million; Loans, $1,000 million; Other<br />
assets, $1,250 million. It has the following liabilities: Deposits, $2,000 million; Other liabilities,<br />
$500 million.<br />
Assets Liabilities<br />
Reserves $250 million Deposits $2,000 million<br />
Loans 1,000 million Other liabilities 500 million<br />
Other assets 1,250 million<br />
Total assets 2,500 million Total liabilities 2,500 million<br />
b. The reserve ratio is 12.5 percent.<br />
The reserve ratio is the percentage of deposits that are held as reserves. Reserves are $250 million<br />
and deposits are $2,000, so the reserve ratio is 12.5 percent.<br />
c. The deposit multiplier is 8.<br />
The deposit multiplier equals 1/(required reserve ratio). The required reserve ratio is 12.5<br />
percent, so the deposit multiplier is 8.