Part of an expansionary fiscal policy

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Reference no: EM13752462

1. Determine whether each of the following is counted in the M1 measure of the money supply:

i. The coins in your piggy bank.

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

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

iv. The traveler's check you have left over from your trip to Germany.

v. The available balance on your Citico Gold MasterCard.

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

Assets		Liabilities
Reserves	$ 10,000	Deposits	$ 70,000
Loans	$ 66,000	Stockholder's equity	$ 6,000

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

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

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

3. Identify each of the following events as:

a) part of an expansionary fiscal policy

b) part of a contractionary fiscal policy

c) part of an expansionary monetary policy

d) part of a contractionary monetary policy

i. The corporate income tax rate is increased.

ii. Defense spending is increased.

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

iv. The individual income tax rate is decreased.

v. The Federal Reserve Bank buys Treasury securities.

4. Assume the Federal government runs a budget deficit in the current fiscal year.

i. How can the Federal government fund the deficit?

ii. If the Federal government decides to issue U.S. Treasury securities to fund the deficit, what happens to the level of national debt, all else held constant?

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

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

Reference no: EM13752462

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