If you take $100 out of your piggy bank and deposit it in your checking account, how did M1 change? Did M2 change?


A bank has deposits of $400. It holds reserves of $50. It has purchased government bonds worth $70. It has made loans of $500. Set up a T-account balance sheet with assets and liabilities, and calculate the bank’s net worth.


Humongous Bank is the only bank in the economy. The people in this economy have $20 million in money, and they deposit all of it in Humongous Bank.

  1. Humongous Bank decides on a policy of holding 100 percent reserves. Draw a T-account for the bank.
  2. Humongous Bank is required to hold 5 percent of its existing $20 million as reserves, and to loan out the rest. Draw a T-account for the bank after this first round of loans has been made.
  3. Assume that Humongous bank is part of a multibank system. How much will the money supply increase with that original loan of $19 million?