1. Determine whether each of the following is counted in the M1 measure of the money supply:
2. The coins in your piggy bank.

Yes, it is part of the M1. Coins in your piggy banks are physical currency in circulation (Croushore, 2007).

1. The funds in your checking account at First National Bank.

Yes, it is part of the M1 because funds represent a checkable deposit.

• The funds in your savings account at Second National Bank.

It is not part of the M1because you cannot use the funds directly as a medium of exchange.

1. The traveler’s check you have left over from your trip to Germany.

It is part of the M1 because they can be spent quickly and easily.

1. The available balance on your Citico Gold MasterCard.

It is not part of the M1 because the vailable balance on your MasterCard does not represent an asset.

2. Refer to the simplified balance sheet for a bank and answer the following questions.

1. If the required reserve ratio is 5%, how much in excess reserves does this bank hold?

If the required ratio by the Fed is 5%, then the required reserve has risen by ($70,000) × (0.005) = $3,500.

Excess reserve = $10,000 – $3,500 = $6,500

1. What is the maximum amount this bank can expand on its loans?

The maximum amount the bank can expand its loan is $6,500, which is the excess reserve.

1. What will happen to the M1 money supply if it makes the loans under (b) above and those funds are deposited into another bank by the borrowers?

If the borrowers deposit funds from loans in (b) above, the M1 money supply will increase.

3. Identify each of the following events as:
4. a) Part of an expansionary fiscal policy
5. b) Part of a contractionary fiscal policy
6. c) Part of an expansionary monetary policy
7. d) Part of a contractionary monetary policy

1. The corporate income tax rate is increased.

Part of a contractionary fiscal policy.

1. Defense spending is increased.

Part of an expansionary fiscal policy

• Families are allowed to deduct all daycare expenses from their federal income taxes.

Part of an expansionary fiscal policy

1. The Federal Reserve Bank sells Treasury securities.

Part of a contractionary monetary policy

1. The Federal Reserve Bank buys Treasury securities.

Part of expansionary monetary policy

4. Assume the Federal government runs a budget deficit in the current fiscal year.
5. How can the Federal government fund (finance) the budget deficit?

If the government spending exceeds taxes revenues, then it experiences a budget deficit. The government can finance the budget deficit by issuing government bonds (Croushore, 2007). When the government borrows money from financial institutions, interest rates will increase. Similarly, the situation would result in crowd out of some private investment spending. Second, the government can finance budget deficit by creating new money (Croushore, 2007). The government can decide to print new money: however, spending will increase without a reduction in consumption or investment.

1. If the Federal government decides to issue U.S. Treasury securities to fund the deficit, what will happen to the level of national debt, all other factor held constant?

The level of national debt will reduce. Treasury securities are varieties of financial assets that any person can buy (Layton, Robinson & Tucker, 2011). Therefore, when a person buys a treasury bond, he loans the money to the Federal government.

iii. Assuming the Federal government and firms compete for the same savers’ dollars in the loanable funds market, what will likely happen to interest rates?

The interest rates will increase. When the Federal government and firms compete, it means that the demand for the savers’ dollars in the loanable funds market is high; therefore, the interest rate will rise.

1. Given your answer under (ii & iii) above, is crowding out more or less likely to occur if the deficit is funded by Treasury securities? Explain.

If the government funds budget deficit through issuing bonds, the crowd out is more likely to occur because the increase in interest rates will result in businesses cutting back their investment spending.

References

Croushore, D. D. (2007). Money and banking: A policy-oriented approach. Boston, MA: Houghton Mifflin Co.

Layton, A., Robinson, T. J., & Tucker, I. B. (2011). Economics for today. Cengage learning.

 
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