Explain and show through the balance sheet structure changes how the following transactions affect the money supply (M1): Transaction 1:The initial Loan from the FN Bank it took by Mark who buys a car from a dealer. Use the balance sheet (T-accounts) to present the effects of this transaction on Mark and the car dealer, assuming that the dealer keeps money in the Second National Bank. How this transaction affects M1? Transaction 2:Assume that another guy, Jack, comes to the Second National Bank and takes the loan in the amount available. He wants to buy machinery for construction (Bulldozer) from the Caterpillar factory. Use the balance sheet (T-accounts) to present the effects of this transaction on Jack and the Caterpillar factory, assuming that the factory keeps money in the Third National Bank. How this transaction affects M1? Does this process stop eventually? Provide an intuition (and calculate) with respect how much money will be created out of the initial deposit ($500).
IS-LM-PC Analysis
The IS (Investment Saving), LM (Liquidity Preference- Money Supply), and PC (Philips Curve) is the model that looks at the dynamics of output and inflation. It takes into account the central bank policy decision to adjust the inflation and real interest rate in the economy. It enables the economist to weather to priorities between employment and inflation rate analyzing the model. It is a practice-driven approach adopted by economists worldwide.
IS-LM Analysis
The term IS stands for Investment, Savings, and LM stands for Liquidity Preference, Money Supply. Therefore, the term IS-LM model is known as Investment Savings – Liquidity preference money Supply. This model was introduced by a Keynesian macroeconomic theory which shows the relationship between the economic goods market and loanable funds market or money market. In other words, it shows how the market for real goods interacts with the financial markets to strike a balance between the interest rate and total output in the macroeconomy. This particular model is designed in the form of a graphical representation of the Keynesian economic theory principle. The output and money are the two important factors in an economy.
Consider the First National Bank that has only Deposits, Reserves and Loans in its balance sheet. Also, assume that it has Deposits = $500 as an initial deposit, while the reserve ratio is 10%. Set up the initial balance sheet structure of the FN Bank that includes Deposits, Reserves and Loans.
Explain and show through the balance sheet structure changes how the following transactions affect the money supply (M1):
Transaction 1:The initial Loan from the FN Bank it took by Mark who buys a car from a dealer. Use the balance sheet (T-accounts) to present the effects of this transaction on Mark and the car dealer, assuming that the dealer keeps money in the Second National Bank. How this transaction affects M1?
Transaction 2:Assume that another guy, Jack, comes to the Second National Bank and takes the loan in the amount available. He wants to buy machinery for construction (Bulldozer) from the Caterpillar factory. Use the balance sheet (T-accounts) to present the effects of this transaction on Jack and the Caterpillar factory, assuming that the factory keeps money in the Third National Bank. How this transaction affects M1?
Does this process stop eventually? Provide an intuition (and calculate) with respect how much money will be created out of the initial deposit ($500).
Draw the T-accounts and explain how these transactions affect the money supply
Trending now
This is a popular solution!
Step by step
Solved in 3 steps with 1 images
