Banks and the Creation of Money

Let's pretend that $1,000 is deposited in a bank, and that each bank loans out all of its excess reserves. For each of the following required reserve ratios, calculate the amount the bank must hold in required reserves, the amount that will be excess reserves and therefore can be loaned out to borrowers, the deposit expansion multiplier, and the maximum amount that the money supply could increase if all excess reserves are loaned out to borrowers.

XXXXXXXXXXXXXXX	Required Reserve Ratio of 5%	Required Reserve Ratio of 10%	Required Reserve Ratio of 15%
Required Reserves	$50
Excess Reserves	$950
Deposit Expansion Multiplier	20
Maximum Increase in the Money Supply	$19,000

Tools of Monetary Policy

Complete the table so that is indicates how the Federal Reserve could use each of the three monetary policy tools to pursue an expansionary policy and a contractionary policy.

Monetary Policy	Expansionary Policy	Contractionary Policy
Open Market Operations
Discount Rate		Raise the discount rate
Reserve Requirements

Federal Reserve Actions and Their Effects

Complete the table by inserting an uparrow or a downarrow in order to best indicate the effect of the specific Fed action.

Federal Reserve Action	Bank Reserves	Money Supply	Federal Funds Rate
Sold Treasury securities on the open market
Bought Treasury securities on the open market
Raised the Discount Rate
Lowered the Discount Rate
Raised the Reserve Requirement
Lowered the Reserve Requirement

More Fed Actions and Their Effects...A.K.A. Monetary Policy In Action

Let's pretend the Federal Reserve wants to help the economy (AS/AD equilibrium is to the left of the LRAS curve) move towards full-employment. Which type of monetary policy (expansionary or contractionary) would the Fed most likely implement?

If the Fed decides the best way to do this is to use open market operations, it would ___________________ (buy or sell) Treasury securities.

In the short run, nominal interest rates should ________________________ (rise or fall) because financial institutions have _______________________ (more or less) funds to lend out because people have _____________________________ (bought or sold) their Treasury securities to the Fed.

Real output in the short run should _______________________ (increase or decrease). This is because with the ___________________________ (increase or decrease) in interest rates, the interest-rate sensitive components of aggregate demand (AD) such as consumption and investment will ____________________________ (increase or decrease).

In the short run, the average price level will ________________________________ (increase or decrease) because the increase in demand can be met only if firms have the incentive to produce _________________________ (more or less). An increasing price level provides this incentive.

Therefore, in summary, an expansionary monetary policy IN THE SHORT RUN will expand the money supply, which in turn ________________________ (increases or decreases) AD, which in turn tends to ______________________________ (increase or decrease) both the price level and output.

Bitcoin as "Money"

Please watch and listen to these two videos and then answer the questions listed below this link:

Bitcoin According to Khan Academy

What are the three main functions of money?

Is Bitcoin money? Why/Why not?