Monetary Policy and Fiscal Policy-MT445

Question

In this Assignment, you will compute the required reserves and excess reserves using bank deposit data. You will also analyze the impacts of fiscal policy and monetary policy on the economy.

MT445-5: Examine how fiscal and monetary policies affect the U.S. economy.

Sample paper

Monetary Policy and Fiscal Policy

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

1. The coins in your piggy bank.

Yes the coins in my piggy bank will definitely be counted in the M1 measure of the money supply.

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

Yes, the funds in my checking account at first national bank will be part of the measure of money supply.

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

No, my money in my saving accounts in the second national bank will not be included in the M1 measure of the money supply.

4. The traveler’s check you have left over from your trip to Germany.

Yes, travelers check will be part and parcel of the M1 of the money supply.

5. The available balance on your Citico Gold MasterCard.

No, the available balance in my master card will not be counted in the M1 of the money supply.

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

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

Answer = excess reserves less required reserves

$ 10,000-(5%* $ 70,000)

Solution = $ 6,500

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

The maximum amount that the bank can expand its loans is $ 6,500

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

There will be no noticeable change in the M1 money supply regardless of the change primarily because the level of medium of exchange such as coins has no effect on M1 (Balatsky, 2012).

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

1. The corporate income tax rate is increased.

Corporate tax is part of contractionary fiscal policy

2. Defense spending is increased.

Part of an expansionary fiscal policy

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

Part of an expansionary fiscal policy

4. The Federal Reserve Bank sells Treasury securities.

Part of an expansionary fiscal policy

5. The Federal Reserve Bank buys Treasury securities.

Part of expansionary fiscal policy

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

1. How can the Federal government fund (finance) the budget deficit?

The federal government can finance the deficits through:

1. By selling government securities and bonds

2. By borrowing funds from the public and other sectors of the economy

3. By borrowing from international bodies such as IMF

2. If the Federal government decides to issue U.S. Treasury securities to fund the deficit, what will happen to the level of national debt, all other factor held constant?

Through the sale of government securities and bonds, the government increases the amount of money in circulation in the economy as compared to the number of goods and services thus, leading to inflation (Shaw, 2016).

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

There is a high probability that the interest rate will increase given the fact that most individuals would prefer to sell their bonds and securities to the government since there is a high probability that the interest rate will increase given the fact that most individuals would prefer to sell their bonds and securities to the government since they will enjoy a certain degree of certainty government will honor its promises.

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

In part (ii), the government will be increasing the amount of money in circulation thus increasing the crowding out effect unlike in part (iii) where it will be competing for the available money in the market with other players of the economy.

References

Balatsky, E. &. (2012). Fiscal Policy and Economic Growth. . Problems of Economic Transition, 54(12), ,             55-70.

Shaw, C. (2016). Fiscal Policy and Economic Growth.