Need help with the following attachment. Please show work. 1. If you take $100 o

Question

Need help with the following attachment. Please show work.

1. If you take $100 out of your piggy bank and deposit it in your checking account, how did M1 change? Did M2 change? 2. A bank has deposits of $400. It holds reserves of $50. It has purchased government bonds worth $70. It has made loans of $500. What is the value of a. total liabilities b. total assets c. the bank's net worth. 3. The central bank requires Somerica Bank to hold 15% of deposits as reserves. Somerica Bank's policy prohibits it from holding excess reserves. If the central bank sells $40 million in bonds to Somerica Bank, how this will impact a. Somerica Bank's assests b. Somerica Bank's liability C. Total money supply Suppose now the central bank purchases $40 million in bonds from Somerica Bank, what will be the results in this case?

Explanation / Answer

Question 1

When $100 is deposited into checking account then currency in circulation decreases by $100 but checking account deposits increases by $100.

Both currency in circulation and checking account deposits are component of M1.

So, increase in one (checking account deposits) and decrease in other (currency in circulation) will keep the balance unchanged.

Thus, M1 will not change.

Similarly,

Both currency in circulation and checking account deposits are component of M2.

So, increase in one (checking account deposits) and decrease in other (currency in circulation) will keep the balance unchanged.

Thus, M2 will not change.

Question 2

(a)

Calculate Total Liabilities -

Total liabilities = Deposits = $400

The value of bank's total liabilities is $400.

Calculate Total Assets -

Total assets = Reserves + Government bonds + Loans

Total assets = $50 + $70 + $500 = $620

The value of bank's total assets is $620.

Calculate the bank's net worth -

Net worth = Total assets - Total liabilities

Net worth = $620 - $400 = $220

The bank's net worth is $220.

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