Question

Sarah has $200,000 in her checking account. Sarah's bank puts $100,000 of it into reserves, and lends the remaining $100,000 to John. John uses the funds to buy a house from Peter, who takes the $100,000 he earned in the sale and puts it in his savings account. John's bank puts $98,000 of these funds into reserves, and uses the remaining $2,000 to make a new loan to Olga. Olga takes this loan in cash since she is about to go on a road trip. Based on the information provided, what is the money supply (M2) in this economy

Answer 1

Answer:

The money supply (M2) in this economy is:

= $302,000.

Explanation:

a) M2 includes cash, checking deposits, and convertible near money (or savings and time deposits, certificates of deposit, and money market funds).  M2 is always higher than M1, which is made up of cash and checking deposits only.

b) Data and Calculations:

M2 in this economy equals to:

Sarah's deposit of $200,000

Peter's deposit of $100,000

Olga's cash of $2,000

Total M2 = $302,000