# Monetary Policy Calcuations

Determine the size of the M1 money supply using the following information. Currency plus traveler's checks $25 million, Negotiable CDs $10 million, Demand deposits $13 million Other checkable deposits $12 million

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

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

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?

d. How would your answer in (c) change if the velocity of money is expected to be three times next year? What is it now?

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?

Following are selected balance sheet accounts for Third State Bank: vault cash _ $2 million; U.S. government securities _ $5 million; demand deposits _ $13 million; non transactional 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.

Let's assume that you have been asked to calculate risk-based capital ratios for a bank with the following accounts:

Cash _ $5 million

Government securities _ $7 million

Mortgage loans _ $30 million

Other loans _ $50 million

Fixed assets _ $10 million

Intangible assets _ $4 million

Loan-loss reserves _ $5 million

Owners' equity _ $5 million

Trust-preferred securities _ $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.

This problem focuses on bank capital management and various capital ratio measures. Following are recent balance sheet accounts for Prime First National Bank. Cash assets $ 17 million Demand deposits $50 million Loans secured by Time & savings

real estate 40 deposits 66

Commercial loans 45 Federal funds

purchased 15

Government Trust-preferred

securities owned 16 securities 2

Goodwill 5

Bank fixed assets 15 Owners' capital 5

Total assets $138 million Total liabilities $138 million

and owners'

capital

All amounts are in millions of dollars.

Note: The bank has loan-loss reserves of $10 million. The real estate

and commercial loans shown on the balance sheet are net of the

loan-loss reserves.

a. Calculate the equity capital ratio. How could the bank increase its equity capital ratio?

b. Risk-adjusted assets are estimated using the following weightings process: cash and government securities _.00; real estate loans _.50; commercial and other loans _ 1.00.

Calculate the risk-adjusted assets amount for the bank.

c. Calculate the Tier 1 Ratio based on the information provided and the risk-adjusted assets estimate from Part b.

d. Calculate the Total Capital (Tier 1 plus Tier 2) Ratio based on the information provided and the risk-adjusted assets estimate from Part b.

e. What actions could the bank management team take to improve the bank's Tier 1 and Total Capital ratios?

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Determine the size of the M1 money supply using the following information. Currency plus traveler's checks $25 million, Negotiable CDs $10 million, Demand deposits $13 million Other checkable deposits $12 million

M1 money supply consists of currency, traveler's checks, demand deposits, and other checkable deposits," (Melicher & Norton, 2010, Pg37). The Negotiable CDs are included in the M3 supply. M3 is the "M2 plus large time deposits and institutional money market funds," (Melicher & Norton, 2010, Pg39).

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

Apply the growth rate to last year's total to find this year's, then apply the growth rate again to find next year's totals.

Example:

Where T-1= Last Year / T0= This Year / T1= Next Year:

Currency T-1= $700

Currency T0= $700 x 1.1= $770

Currency T1= $770 x 1.1= $847

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.

The primary quantity theory of money follows:

M x V = P x T

Where: M= Money Supply

V= Velocity of Money

P= Average Price level of goods

T= Index of expenditures/Production

This can be manipulated for simplicity-assuming Price Level x Expenditures is a reasonable assessment of GDP.

V = GDP/M

Where: GDP= Gross Domestic Product

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

V= 100,000,000/20,000,000

V= 5

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

V= 100,000,000/50,000,000

V= 2

c. Determine the average price for the real output

M x V = P x T

P= (M x V)/T

P= (20,000,000 x 5)/500,000

P= 200

 

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?

This year sales= 12,000

V=GDP/M

V= 20,000,000/7,000,000

V= 2.85

P= (M x V)/T

P= (7,000,000 x 2.85)/12,000

P= $1662.50

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 ...

#### Solution Summary

Detailed calculations- showing formula and work- for:

1- Determining size of money supply (M1 and M2)

2- Velocity of money

3- Average Price and real output

4- Discount Rate and APR

5- Bank's capital ratio requirements

6- Weighted, risk-adjusted, total capital ratio