Quoted from Astrid Mitchells 10 Most Famous Counterfeiting Scandals, Anastasios Arnaouti is a criminal from Manchester who led one of the most ambitious forgery operations in history before he and his accomplices were jailed in 2005. The total amount of counterfeit money they produced is unknown as their printing operation had been in production for several years, and was capable of producing tens of thousands of counterfeit notes each day. The extent of the crime was considered so severe that it could have compromised the UK and US economies. Assume Anastasios escapes from prison and re-establishes his counterfeit operation in the US. In his first 100 days, he is able to produce 10,000 $100 bills each day, totaling $100 million dollars. He distributes this money to the unemployed to get it into circulation.

a. The reserve requirement imposed by the Fed varies between 3% and 10% depending on the size of the depository institution. Assume that on average across all institutions, 7% of deposits are held as reserves; what then is the maximum possible change in the size of the money supply due to this unexpected injection of $100 million? What factors could prevent the full maximum change from occurring?

b. Describe the possible effect of this change in the money supply on the following: Interest rates Inflation Unemployment Jerome Powell and his fellow governors are perplexed by the unanticipated growth of the money supply. What action do you expect the Fed will take to combat this unexpected change? How will that action actually decrease the money supply?

d. An investment firm trading in the bond market for strictly speculative purposes (in other words, it is trying to make money on short-term fluctuations in bond prices rather than buying bonds for long-term investment) also notices that the value of M1 is well above the published target amount of M1 set by the Fed. Should the firm buy bonds or sell bonds in anticipation of the Feds action described in (c)? Explain.