ECONOMICS :

 

QUESTIONS :

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1. Determine the size of the M1 money supply using the following  information.

 

Currency         $700 billion

 

Money market mutual funds     $2,000 billion

 

Demand deposits      $300 billion

 

Other checkable deposits      $300 billion

 

Traveler’s checks     $10 billion

 

2. Following are components of the M1 money supply at the end of last year. What will be the size of the M1 money supply at the end of next year if currency grows by 10 percent, demand deposits grow by 5 percent, other checkable deposits grow by 8 percent, and the amount of traveler’s checks stays the same?

 

Currency    $700 billion

 

Demand deposits    $300 billion

 

Other checkable deposits    $300 billion

 

Traveler’s checks    $10 billion

 

3. Assume that a country estimates its M1 money supply at $20 million. A broader measure of the money supply, M2, is $50 million. The country’s gross domestic product is $100 million. Production or real output for the country is 500,000 units or products.

 

a. Determine the velocity of money based on the M1 money supply.

 

b. Determine the velocity of money based on the M2 money supply.

 

c. Determine the average price for the real output.

 

4. The One Product economy, which produces and sells only personal computers (PCs), expects that it can sell 500 more, or 12,500 PCs, next year. Nominal GDP was $20 million this year, and the money supply was $7 million. The central bank for the One Product economy plans to increase the money supply by 10 percent next year.

 

a. What was the average selling price for the personal computers this year?

 

b. What is the expected average selling price next year for personal computers if the velocity of money remains at this year’s turnover rate? What percentage change in price level is expected to occur?

 

c. If the objective is to keep the price level the same next year (i.e., no inflation), what percentage increase in the money supply should the central bank plan for?

 

5. The following three one-year “discount” loans are available to you:

 

Loan A: $120,000 at a 7 percent discount rate

 

Loan B: $110,000 at a 6 percent discount rate

 

Loan C: $130,000 at a 6.5 percent discount rate

 

a. Determine the dollar amount of interest you would pay on each loan and indicate the amount of net proceeds each loan would provide. Which loan would provide you with the most upfront money when the loan takes place?

 

b. Calculate the percent interest rate or effective cost of each loan. Which one has the lowest cost?

 

 6. Following are selected balance sheet accounts for Third State Bank: vault cash= $2 million; U.S. government securities = $5 million; demand deposits = $13 million; nontransactional accounts= $20 million; cash items in process of collection =$4 million; loans to individuals =$7 million; loans secured by real estate=$9 million; federal funds purchased=$4 million; and bank premises=$11 million.

 

a. From these accounts, select only the asset accounts and calculate the bank’s total assets.

 

b. Calculate the total liabilities for Third State Bank.

 

c. Based on the totals for assets and liabilities, determine the amount in the owners’ capital account.

 

7. Let’s assume that you have been asked to calculate risk-basedcapital ratios for a bank with the following accounts:

 

Cash [1] $5 million

 

Government securities [1] $7 million

 

Mortgage loans [1] $30 million

 

Other loans [1] $50 million

 

Fixed assets [1] $10 million

 

Intangible assets [1] $4 million

 

Loan-loss reserves [1] $5 million

 

Owners’ equity [1] $5 million

 

Trust-preferred securities [1] $3 million

 

Cash assets and government securities are not considered risky. Loans secured by real estate have a 50 percent weighting factor. All other loans have a 100 percent weighting factor in terms of riskiness.

 

a. Calculate the equity capital ratio.

 

b. Calculate the Tier 1 Ratio using risk-adjusted assets.

 

c. Calculate the Total Capital (Tier 1 plus Tier 2) Ratio using risk-adjusted assets.