Money creation

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Alicia Ross

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I need a 100-word reply to each of the following 8 post. (800 words total). I do conduct a plagiarism check before I make the final payment (been burned in the past) so please make it original (most of you are great and I have been totally satisfied). These post are from a finance course: Forum #1 If Bank A has an increase in deposits of $100M and their required reserves is 10%, then the must hold $10M in required reserves. This means that there is $90M in excess reserves that is available to loan, assuming that they want to use all of it for loans instead of making investments. Bank A Assets Liabilities Required reserves +$10M Checkable deposits $100M Excess reserves $90M If Bank A loans out the entire $90M, then another bank will receive the funds as checkable deposits and also be required to hold 10% of the amount in reserves. At this point, we’ll call it Bank B, they will be required to hold $9M in required reserves and have $81M in excess reserves available to loan. Bank B Assets Liabilities Required reserves +$9M Checkable deposits $90M Excess reserves +$81M Then let’s say that Bank B loans out all $81M and this amount gets deposited into Bank C. Bank C is now required to hold $8.1M in required reserves and has $72.9M in excess reserves, which it can also loan out. Bank C Assets Liabilities Required reserves +$8.1M Checkable deposits +$81M Excess reserves $72.9M At this point, the money supply has grown by $271M ($100M Bank A + $90M Bank B + $81M Bank C). The process can repeat, each time increasing the money supply and is called multiple deposit creation. The textbook provides a definition, “Part of the money supply process in which an increase in bank reserves results in rounds of bank loans and creation of checkable deposits and an increase in the money supply that is a multiple of the initial increase in reserves” (Hubbard, 2013, p. 427). The amount of the money supply has grown due to the original source that Bank A has received the $100M from. Bank A has helped to increase the money supply by loaning the $90M it had in excess reserves. Therefore, Bank A’s contribution was the $90M. In order to discover how much money the banking system as a whole can create, the simple deposit multiplier can be used. This is “[t]he ratio of the amount of deposits created by banks to the amount of new reserves” (Hubbard, 2013, p. 427). This can calculation can be used for this scenario because the simple deposit multiplier assumes that no banks are going to hold any excess reserves beyond the required amount of 10%. The initial amount of increase in deposits was $100M and of that amount $10M was required in reserves. Therefore, the simple deposit multiplier is $100M/$10M and is equal to .

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1. One of the functions of money is that it is a ‘store of value’. Explain 2. What is the difference between fiat money and a credit card? 3. How do commercial banks maximize their stockholders’ wealth? 4. The Federal Reserve System (the Fed) is the central bank of the United States. What are its primary functions? 5. Assume that the US economy is experiencing a rather severe recession. How might the Fed utilize the discount rate to speed up the economy? Explain in detail. 6. Assume that the US economy is experiencing a rather severe recession. How might the Fed utilize open market operations to speed up the economy (use lecture notes to answer this)? Explain in detail. 7. Using the explanation in the lecture, explain how the Fed’s purchase of bonds (securities) on the open market can not only increase the money supply through banks’ lending but also decrease the EFFECTIVE interest rate for borrowers. Use an example with actual interest rates. 8. Explain how the required reserve requirement can be used by the Fed to either expand or contract the money supply. 9. A) Using the formula given in the lecture, calculate how much the money supply would increase given an injection of $10 million with a required reserve ratio of 5%. B) Given the same data, how much would the money supply decrease if $10 million were taken out of the money supply with a 5% required reserve ratio?. 10. What 3 events turned an ordinary recession in 1929 into the Great Depression? 11. Ironically technological advancements have made bartering, which used to be an extremely inefficient exchange of values, more and more popular in the present day. Think of and identify four situations where present-day bartering becomes beneficial to both sides of the transaction. 12. Assume that you have 100 $1 bills. Assume also that I have 4 $100 bills. Explain why even though you have more paper money (100 pieces of paper), the value of my four pieces of paper is greater than yours. 13. The Federal Reserve can in effect expand or contract the supply of money in the US. a. Explain what you think the Fed must do to expand the money supply. b. Identify 2 reasons why the Fed would do this. 14. Is it possible that the Fed, since it supposedly acts independently of the US government, could use monetary policies (expanding or contracting the money supply) in order to benefit only the wealthiest corporations and individuals while ignoring the lower classes? Explain your opinion here in detail. 15. Explain your opinion as to whether you feel that using a central bank (the Fed) to control all of the US’s major monetary policies as well as all of its money is dangerous? What might be some of the unintended consequences of giving this much power to one private entity? Module 7 Lecture (Ch. 18): Money and the Monetary System What Is Money? The answer seems simple enough, yet there are some false illusions as to what is and what is not money. Basically, money is anything that is commonly accept.

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1. Following the stock market crash in October 1987 and the terrorist attack in September 2001 the Federal Reserve rapidly increased the amount of money in circulation and lowered interest rates. Why did the Federal Reserve take these actions and what impact do you believe they had? 2. From early 2005 through August 2006, the Federal Reserve steadily raised short term interest rates, being concerned about potential inflationary pressures. It then held short term rates steady through August 2007, saying that it remained very watchful about possible inflationary dangers. However in September 2007 it suddenly dropped rates and took other steps to aid capital market liquidity. Recently short term rates have been maintained at extremely low rates (effectively zero percent for a while). Now there are fears of a double-dip recession and potential deflation on one hand and other fears of potential high inflation in the foreseeable future. If you were sitting on the Open Market Committee today, how would you go about deciding what policy path to take, particularly given the lag in the effect of some monetary policies on the real economy? Note on Money and Monetary Policy Fiscal and monetary policy represent two fundamental tools of macroeconomics. In the 1930s, John Maynard Keynes focused attention on the power of countercyclical fiscal policy, an emphasis that dominated policy circles in the United States and elsewhere at least into the 1960s. Since then, however, policymakers in many countries have relied more heavily on monetary policy to manage the business cycle. Changes in intellectual fashion and political calculation have driven this shift. Policymakers have learned that the legislative process is often too slow to allow for fiscal fine tuning, since the budget cannot always be adjusted fast enough in the face of rapidly changing economic circumstances. They have also discovered that fiscal policy suffers a systematic bias in favor of stimulus because national legislatures generally find it politically easier to run deficits than surpluses. Monetary policy, by contrast, may be less prone to such problems. Central banks can change policy relatively quickly in response to new conditions. Moreover, central banks are often insulated from domestic political pressures and so better able to impose economic restraint. The Money Identity In theory, monetary policy rests on a simple identity: economic output, measured in current dollars, equals the amount of money in circulation multiplied by how often that money changes hands. Economists will recognize this as MxV=PxQ in which M equals the money supply, V the velocity or turnover of money, P the price level, and Q the quantity of output. Each side of the identity equals nominal GDP; and Q, by itself, represents real GDP . Like most identities, this one clarifies important relationships but also conceals difficult questions that require answers if it is to be used effectiv ...

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