You sell a few shares of stock and put the proceeds into your savings account.
You sell a few shares of stock and put the proceeds into your checking account.
You transfer money from your savings account to your checking account.
You discover $0.25 under the floor mat in your car and deposit it in your checking account.
You discover $0.25 under the floor mat in your car and deposit it in your savings account.
Bottles of rum were used to pay for goods in colonial Australia.
Salt was used in many European countries as a medium of exchange.
For a brief time, Germany used paper money (the “Rye Mark”) that could be redeemed for a certain amount of rye, a type of grain.
The town of Ithaca, New York, prints its own currency, the Ithaca HOURS, which can be used to purchase local goods and services.
The table below shows the components of M1 and M2 in billions of dollars for the month of December in the years 2000 to 2010 as published in the 2011 Economic Report of the President. Complete the table by calculating M1, M2, currency in circulation as a percentage of M1, and currency in circulation as a percentage of M2. What trends or patterns about M1, M2, currency in circulation as a percentage of M1, and currency in circulation as a percentage of M2 do you see? What might account for these trends?
Year | Currency in circulation | Traveler’s checks | Checkable deposits | Savings deposits | Time deposits | Money market funds | M1 | M2 | Currency in circulation as a percentage of M1 | Currency in circulation as a percentage of M2 |
---|---|---|---|---|---|---|---|---|---|---|
2000 | $531.2 | $8.3 | $547.7 | $1,878.0 | $1,046.0 | $902.0 | ? | ? | ? | ? |
2001 | 581.1 | 8.0 | 592.9 | 2,309.5 | 974.5 | 962.5 | ? | ? | ? | ? |
2002 | 626.2 | 7.8 | 585.7 | 2,773.4 | 894.5 | 887.5 | ? | ? | ? | ? |
2003 | 662.5 | 7.7 | 636.2 | 3,162.8 | 817.8 | 777.0 | ? | ? | ? | ? |
2004 | 697.7 | 7.6 | 671.1 | 3,508.8 | 827.9 | 694.7 | ? | ? | ? | ? |
2005 | 724.1 | 7.2 | 643.5 | 3,606.0 | 993.1 | 699.4 | ? | ? | ? | ? |
2006 | 749.6 | 6.7 | 610.0 | 3,694.6 | 1,205.3 | 799.0 | ? | ? | ? | ? |
2007 | 759.7 | 6.3 | 607.6 | 3,872.6 | 1,275.0 | 972.7 | ? | ? | ? | ? |
2008 | 815.0 | 5.5 | 782.1 | 4,106.1 | 1,455.7 | 1,080.5 | ? | ? | ? | ? |
2009 | 861.5 | 5.1 | 827.0 | 4,836.9 | 1,177.4 | 820.8 | ? | ? | ? | ? |
2010 | 915.7 | 4.7 | 911.7 | 5,357.6 | 926.6 | 700.0 | ? | ? | ? | ? |
$95 on your campus meal card
$0.55 in the change cup of your car
$1,663 in your savings account
$459 in your checking account
100 shares of stock worth $4,000
A $1,000 line of credit on your Sears credit card
How does the deposit initially change the T-account of the local bank? How does it change the money supply?
If the bank maintains a reserve ratio of 10%, how will it respond to the new deposit?
If every time the bank makes a loan, the loan results in a new checkable bank deposit in a different bank equal to the amount of the loan, by how much could the total money supply in the economy expand in response to Tracy’s initial cash deposit of $500?
If every time the bank makes a loan, the loan results in a new checkable bank deposit in a different bank equal to the amount of the loan and the bank maintains a reserve ratio of 5%, by how much could the money supply expand in response to Tracy’s initial cash deposit of $500?
How will the withdrawal change the T-account of the local bank and the money supply?
If the bank maintains a reserve ratio of 10%, how will it respond to the withdrawal? Assume that the bank responds to insufficient reserves by reducing the amount of deposits it holds until its level of reserves satisfies its required reserve ratio. The bank reduces its deposits by calling in some of its loans, forcing borrowers to pay back these loans by taking cash from their checking deposits (at the same bank) to make repayment.
If every time the bank decreases its loans, checkable bank deposits fall by the amount of the loan, by how much will the money supply in the economy contract in response to Ryan’s withdrawal of $400?
If every time the bank decreases its loans, checkable bank deposits fall by the amount of the loan and the bank maintains a reserve ratio of 20%, by how much will the money supply contract in response to a withdrawal of $400?
What is M1?
What is the monetary base?
Are the commercial banks holding excess reserves?
Can the commercial banks increase checkable bank deposits? If yes, by how much can checkable bank deposits increase?
In Westlandia, the public holds 50% of M1 in the form of currency, and the required reserve ratio is 20%. Estimate how much the money supply will increase in response to a new cash deposit of $500 by completing the accompanying table. (Hint: The first row shows that the bank must hold $100 in minimum reserves—20% of the $500 deposit—against this deposit, leaving $400 in excess reserves that can be loaned out. However, since the public wants to hold 50% of the loan in currency, only $400 × 0.5 = $200 of the loan will be deposited in round 2 from the loan granted in round 1.) How does your answer compare to an economy in which the total amount of the loan is deposited in the banking system and the public doesn’t hold any of the loan in currency? What does this imply about the relationship between the public’s desire for holding currency and the money multiplier?
Round | Deposits | Required reserves | Excess reserves | Loans | Held as currency |
---|---|---|---|---|---|
1 | $500.00 | $100.00 | $400.00 | $400.00 | $200.00 |
2 | 200.00 | ? | ? | ? | ? |
3 | ? | ? | ? | ? | ? |
4 | ? | ? | ? | ? | ? |
5 | ? | ? | ? | ? | ? |
6 | ? | ? | ? | ? | ? |
7 | ? | ? | ? | ? | ? |
8 | ? | ? | ? | ? | ? |
9 | ? | ? | ? | ? | ? |
Total after 10 rounds | ? | ? | ? | ? | ? |
The required reserve ratio is 25%, and a depositor withdraws $700 from his checkable bank deposit.
The required reserve ratio is 5%, and a depositor withdraws $700 from his checkable bank deposit.
The required reserve ratio is 20%, and a customer deposits $750 to her checkable bank deposit.
The required reserve ratio is 10%, and a customer deposits $600 to her checkable bank deposit.
How will the money supply change if the required reserve ratio falls to 5%?
How will the money supply change if the required reserve ratio rises to 25%?
Using Figure 16-6, find the Federal Reserve district in which you live. Go to http://www.federalreserve.gov/bios/pres.htm and click on your district to identify the president of the Federal Reserve Bank in your district. Go to http://www.federalreserve.gov/fomc/ and determine if the president of the regional Federal Reserve bank in your district is currently a voting member of the Federal Open Market Committee (FOMC).
Why do U.S. taxpayers lose because of North Korea’s counterfeiting?
As of November 2012, the interest rate earned on one-year U.S. Treasury bills was 0.18%. At a 0.18% rate of interest, what is the amount of money U.S. taxpayers are losing per year because of these $45 million in counterfeit notes?
Under “Statement of Condition of Each Federal Reserve Bank,” look in the “Total” column. What is the amount displayed next to “Total assets”? What is the amount displayed next to “U.S. Treasury securities”? What percentage of the Federal Reserve’s total assets are currently made up of U.S. Treasury bills?
Do the Federal Reserve’s assets consist primarily of U.S. Treasury securities, as they did in January 2007, the beginning of the graph in Figure 16-9, or does the Fed still own a large number of other assets, as it did in mid-2011, the end of the graph in Figure 16-9?
What caused the drop in new housing starts in 1984–1991?
What caused the drop in new housing starts in 2006–2009?
How could better regulation of financial institutions have prevented these two instances?
Show the changes to the T-accounts for the Federal Reserve and for commercial banks when the Federal Reserve buys $50 million in U.S. Treasury bills. If the public holds a fixed amount of currency (so that all loans create an equal amount of deposits in the banking system), the minimum reserve ratio is 10%, and banks hold no excess reserves, by how much will deposits in the commercial banks change? By how much will the money supply change? Show the final changes to the T-account for commercial banks when the money supply changes by this amount.
Show the changes to the T-accounts for the Federal Reserve and for commercial banks when the Federal Reserve sells $30 million in U.S. Treasury bills. If the public holds a fixed amount of currency (so that all new loans create an equal amount of checkable bank deposits in the banking system) and the minimum reserve ratio is 5%, by how much will checkable bank deposits in the commercial banks change? By how much will the money supply change? Show the final changes to the T-account for the commercial banks when the money supply changes by this amount.