Computational questions The following table represents the monetary supply compo

Question

Computational questions

The following table represents the monetary supply components of an economy, assuming there are no tourist checks:

$1,000

$2,000

$15,000

A) Calculate the M1 (money supply in the narrow sense) of this economy. =

B) Calculate 2M (broad money supply) for this economy. =

C) Suppose you withdrew $ 1000 from your savings account and took that amount into your pocket. Explain briefly how this will affect M1 and M2.

2) Suppose that the bank has $ 100 million of deposits in current accounts and the ratio of compulsory (compulsory) reserve is 20 percent. If the central bank reduces the mandatory (mandatory) reserve ratio to 15 percent. Calculate excess reserves (amount of funds available for lending) to the bank.

3) If the nominal exchange rate between the US dollar and the Canadian dollar is C $ 0.89 to the US dollar, how many dollars is required to buy a $ 2.5 CAD product?

2) Describe and explain the tools used by the central bank to reduce money supply.

$1,000

  currency

$2,000

  Current account

$15,000

  Saving account

Explanation / Answer

(1)

(A) M1 = Amount of currency = $1,000

(B) M2 = M1 + Current account + Saving account = $(1,000 + 2,000 + 15,000) = $18,000

(C) The withdrawal will increase cash with public by $1,000, so M1 will increase by $1,000. It will also lower savings account balance by $1,000, so M2 will remain unchanged as the result of equal increase and decrease of two components of M2.

NOTE: As per Chegg Answering Policy, 1st question is answered.

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