Answered: If everyone in the economy decides to…

ECON MACRO

5th Edition

ISBN:9781337000529

Author:William A. McEachern

Publisher:William A. McEachern

Chapter14: Banking And The Money Supply

Section: Chapter Questions

Problem 3.4P

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Please choose the correct answers:

If everyone in the economy decides to close their bank accounts and hold all their money on
hand, this will cause overall M1 to rise / fall / remain unchanged / change ambiguously and
overall M2 to rise / fall / remain unchanged / change ambiguously.

Money functions as a medium of exchange because it is readily exchangeable for other goods.
A) True
B) False

Money supply rises when banks decide to hold excess reserves over and above what they are
legally required to hold against deposits.
A) True
B) False

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.

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why does m2 fall and not remain unchanged? doesn't M2 consist of both M1 and M2? so when M1 rise (due to more cash), savings account (which is under M2) will drop by the same amount as M1 rise, hence overall M2 will remain unchanged?

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