Question

1. Suppose you deposit $5,000 cash into your checking account deposit at Bank and that the required reserve ratio is 10%. As a result of your deposit, this bank can make a maximum loan to other customers of

a. $500

b. $4500

c. $5000

d.$50000

2. If you withdraw $2,000 from your term deposit account and put it in your checking account, M1 will _____ and M3 will ____.

3. In 2015, the inflation rate of Venezuela reached 181%. In April 2019, the International Monetary Fund estimated that inflation in Venezuela would reach 10,000,000% by the end of 2019. As a result, many stores would not even accept the national currency, instead favouring foreign currencies like U.S. dollar. Which of the following functions of money for Venezuelan currency would be hard to satisfy under this serious situation?

a. Unit of account

b. Store of value

c. Medium of exchange

d. All of the above

Answer 1

1) 4500

(Required reserves =5000*10/100=500

Excess reserves= 5000-500=4500

Bank can lend these excess reserves.

Thus, Maximum loans bank can make =4500)

2) increase, not change.

(M1 includes that are most liquid.M1 includes cash , checkable deposits and traveler's checks .So deposit of 2000 in checking account results in an increase in M1. M3 on the other hand includes checkable deposits and term deposits. So withdrawal from term deposits and deposit in checkable deposits doesn't change M1)

3) All of the above.

( inflation would lead to a reduction in the value of money. Citizens started to favour US dollar to national currency. It means that store of value function and unit of account function of money is affected.Stores refuse to act national currency. So medium of exchange function is also affected.)