Explanation Given: Bank deposits at the central bank are $200 million. Currency held by public is $150 million. Currency in bank vaults is $100 million. Required reserve ratio is 10%. Checkable bank deposits are $500 million. Traveler’s checks are $10 million. a. Value of M1. Formula to calculate M1: Substitute $150 million for currency held by the public, $500 million for checkable deposits and $10 million for traveler’s checks: Conclusion: Thus, M1 is $660 million. b. Monetary base. Formula to calculate monetary base: Substitute $150 million for currency held by the public, $100 million for reserves of the commercial bank and $200 million for bank deposits at the central bank: Conclusion: Thus, monetary base is $450 million. c. Commercial bank holdings. Formula to calculate Reserves held by Bank: Substitute 10% for required reserve ratio and $500 for total deposits:

M1 Money Supply : It is the tool used to measure the money supply or liquidity of money. M1 is considered as narrow money because it only includes that part of the money which is in the form of cash, demand deposits and travelers’ checks. M2 Money Supply : It is the tool used to measure the money supply or liquidity of money. M2 is considered as broad money because it includes M1 and addition to it, it also includes savings and time deposits, funds of money market , certificate of deposits. Money Supply: It refers to that amount of money which is in circulation within the economy at a particular point of time. It includes cash currency and all the liquid assets which can be converted into cash on demand.

Economics

5th Edition

ISBN: 9781319066604

Author: Paul Krugman, Robin Wells

Publisher: Worth Publishers

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Question

Definition Definition Capital reserves held by banks or financial institutions over and above the reserves that are required to be maintained by the regulator toward its liabilities and for internal controls. For commercial banks, excess reserve is the amount over the standard reserve as decided by the central bank. These excess reserve funds are available in the form of cash and cash equivalents.

Chapter 29, Problem 7P

To determine

Concept Introduction:

M1 Money Supply: It is the tool used to measure the money supply or liquidity of money. M1 is considered as narrow money because it only includes that part of the money which is in the form of cash, demand deposits and travelers’ checks.

M2 Money Supply: It is the tool used to measure the money supply or liquidity of money. M2 is considered as broad money because it includes M1 and addition to it, it also includes savings and time deposits, funds of money market, certificate of deposits.

Money Supply: It refers to that amount of money which is in circulation within the economy at a particular point of time. It includes cash currency and all the liquid assets which can be converted into cash on demand.

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