Question

PLEASE SHOW CALCULATIONS

1.If the required reserve ratio (RRR) in the U.S. is 40 percent and Allen deposits a $10,000 U.S. National Bank check from his parents into his checking account in another U.S. bank, then the change in the U.S. money supply should be               

A. No change

B. A $15,000 increase.

C. A $25,000 increase.

2. Which of the following is considered as money in economics?

A. The coins you use for transaction.

B. The Visa credit card you carry.

C. The reward points of online retail.

3. If the required reserve ratio (RRR) in the U.S. and Germany are both 40 percent and Allen receives $10,000 wiring money from his parents in Germany into his U.S. National Bank checking account, then the change in the Germany money supply should be

A. No change

B. A $4,000 decrease

C. A $15,000 decrease

4. James takes $50 out of his cookie jar and deposits it in his checking account. As a result of this transaction, M1 eventually:

A. Increases by less than $50.

B. Increases by more than $50.

C. Does not change.

5. If the required reserve ratio (RRR) in the U.S. is 40 percent and Allen gathers $10,000 from cash sales and deposit the money into his U.S. National Bank checking account, then the change in the U.S. money supply should be       

A. No change

B. A $4,000 increase

C. A $15,000 increase

Answer 1

1. A. No change

Since the money is transferred from one bank to another, there would be no effect on the money supply because ultimately only the account in which money is deposited is changed.

2. A. The coins you use for transaction

Money is a medium of exchange that is generally accepted as payment for goods and services and repayment of debts. The currency is the money. Credit cards are 'near money'.

3. A $10,000 decrease

4. C. Does not change

M1 = currency in hands + demand deposits + traveler's checks

The $50 simply change from being 'currency in hands' to 'demnd deposits'.

5. C. A $15,000 increase

Change in money supply = primary depost x 1/rr = 10,000 x 1/0.4 = $25,000

Thus through banks lending capacity, $25000 worth money supply will increase. Out of this, $10,000 was already held in cash and a part of money supply. Thus change in money supply = 25,000 - 10,000 = $15,000.