402

P A R T 4    Central Banking and the Conduct of Monetary Policy

Changes in the Required Reserve Ratio, rr

If the required reserve ratio on checkable deposits increases while all other variables,
such as the monetary base, stay the same, we have seen that multiple deposit expansion
is reduced and hence the money supply falls. If, on the other hand, the required reserve
ratio falls, multiple deposit expansion is higher and the money supply rises.
We now have the following result: The money supply is negatively related to the
required reserve ratio rr. In the past, the Fed sometimes used reserve requirements
to affect the size of the money supply. In recent years, however, reserve requirements
have become a less important factor in the determination of the money multiplier and
the money supply, as we shall see in the next chapter.

Changes in Excess Reserves

When banks increase their holdings of excess reserves, those reserves are no longer
being used to make loans, causing multiple deposit creation to stop dead in its tracks,
resulting in less expansion of the money supply. If, on the other hand, banks choose to
hold fewer excess reserves, loans and multiple deposit creation increase, and the money
supply rises. The money supply is negatively related to the amount of excess reserves.
Recall from Chapter 9 that the primary benefit to a bank of holding excess reserves
is that they provide insurance against losses due to deposit outflows; that is, they enable
the bank experiencing deposit outflows to escape the costs of calling in loans, selling
securities, borrowing from the Fed or other corporations, or bank failure. If banks fear
that deposit outflows are likely to increase (that is, if expected deposit outflows increase),
they will seek more insurance against this possibility, and excess reserves will rise.

Changes in Currency Holdings

As shown before, checkable deposits undergo multiple expansion, whereas currency
does not. Hence, when checkable deposits are converted into currency, as long as the
amount of excess reserves are held constant, a switch is made from a component of
the money supply that undergoes multiple expansion to one that does not. The overall
level of multiple expansion declines, and the money supply falls. On the other hand,
if currency holdings fall, a switch is made into checkable deposits that undergo mul-
tiple deposit expansion, so the money supply rises. This analysis suggests the following
result: Holding excess reserves constant, the money supply is negatively related to
currency holdings.

OVERVIEW OF THE MONEY SUPPLY PROCESS

We now have a model of the money supply process in which all three of the players—
the Federal Reserve System, depositors, and banks—directly influence the money supply.
As a study aid, Summary Table 1 charts the money supply responses to the five factors
discussed above and gives a brief synopsis of the reasoning behind them.
The variables are grouped by the player who is the primary influence behind the
variable. The Federal Reserve, for example, influences the money supply by controlling
the first two variables. Depositors influence the money supply through their decisions
about holdings of currency, while banks influence the money supply with their deci-
sions about borrowings from the Fed and excess reserves.

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 C H A P T E R 1 5    The Money Supply Process 403

SUMMARY TABLE 1
Money Supply Response
Change in Money Supply
Player Variable Variable Response Reason
Federal Reserve Nonborrowed monetary ↑ ↑ More MB for deposit
System base, MBn creation
  Required reserve ratio, rr ↑ ↓ Less multiple deposit
expansion
Banks Borrowed reserves, BR ↑ ↑ More MB for deposit
creation
  Excess reserves ↑ ↓ Less loans and deposit
creation
Depositors Currency holdings ↑ ↓ Less multiple deposit
expansion
Note: Only increases (↑) in the variables are shown. The effects of decreases on the money supply would be the opposite of those
indicated in the “Money Supply Response” column.

THE MONEY MULTIPLIER

The intuition inherent in the preceding section is sufficient for you to understand
how the money supply process works. For those of you who are more mathemati-
cally inclined, we can derive all of the above results using a concept called the money
multiplier, denoted by m, which tells us how much the money supply changes for a
given change in the monetary base. The relationship between the money supply M, the
money multiplier, and the monetary base is described by the following equation:
M = m * MB (2)
The money multiplier m tells us what multiple of the monetary base is transformed
into the money supply. Because the money multiplier is typically larger than 1, the
alternative name for the monetary base, high-powered money, is logical: A $1 change in
the monetary base typically leads to more than a $1 change in the money supply.

Deriving the Money Multiplier

Let’s assume that the desired holdings of currency C and excess reserves ER grow pro-
portionally with checkable deposits D; in other words, we assume that the ratios of
these items to checkable deposits are constants in equilibrium, as the braces in the fol-
lowing expressions indicate:

c = 5C>D6 = currency ratio

e = 5ER>D6 = excess reserves ratio

M15_MISH8859_12_GE_C15.indd 403 26/07/18 4:58 PM

 404 P A R T 4    Central Banking and the Conduct of Monetary Policy

We will now derive a formula that describes how the currency ratio desired by deposi-
tors, the excess reserves ratio desired by banks, and the required reserve ratio set by the
Fed affect the multiplier m. We begin the derivation of the model of the money supply
with the following equation:
R = RR + ER
which states that the total amount of reserves in the banking system R equals the sum
of required reserves RR and excess reserves ER. (Note that this equation corresponds to
the equilibrium condition RR = R given earlier in the chapter, where excess reserves
were assumed to be zero.)
The total amount of required reserves equals the required reserve ratio rr times the
amount of checkable deposits D:
RR = rr * D
Substituting rr * D for RR in the first equation yields an equation that links reserves in
the banking system to the amount of checkable deposits and excess reserves they can
support:
R = (rr * D) + ER
A key point here is that the Fed sets the required reserve ratio rr to less than 1. Thus
$1 of reserves can support more than $1 of deposits, and the multiple expansion of
deposits can occur.
Let’s see how this works in practice. If excess reserves are held at zero (ER = 0),
the required reserve ratio is set at rr = 0.10, and the level of checkable deposits in the
banking system is $1,600 billion, then the amount of reserves needed to support these
deposits is $160 billion ( = 0.10 * $1,600 billion). The $160 billion of reserves can
support ten times this amount in checkable deposits because multiple deposit creation
will occur.
Because the monetary base MB equals currency C plus reserves R, we can gener-
ate an equation that links the amount of the monetary base to the levels of checkable
deposits and currency by adding currency to both sides of the preceding equation:
MB = R + C = (rr * D) + ER + C
Notice that this equation reveals the amount of the monetary base needed to support
the existing amounts of checkable deposits, currency, and excess reserves.
To derive the money multiplier formula in terms of the currency ratio c = 5C>D6
and the excess reserves ratio e = 5ER>D6, we rewrite the last equation, specifying C
as c * D and ER as e * D:
MB = (rr * D) + (e * D) + (c * D) = (rr + e + c) * D
We next divide both sides of the equation by the term inside the parentheses to get an
expression linking checkable deposits D to the monetary base MB:
1
D = * MB (3)
rr + e + c
Using the M1 definition of the money supply as currency plus checkable deposits
(M = D + C) and again specifying C as c * D, we get
M = D + (c * D) = (1 + c) * D

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 C H A P T E R 1 5    The Money Supply Process 405

Substituting in this equation the expression for D from Equation 3 yields

1 + c
M = * MB (4)
rr + e + c
We have derived an expression in the form of our earlier Equation 2. As you can
see, the ratio that multiplies MB is the money multiplier, which tells how much the
money supply changes in response to a given change in the monetary base (high-pow-
ered money). The money multiplier m is thus
1 + c
m = (5)
rr + e + c
It is a function of the currency ratio set by depositors c, the excess reserves ratio set by
banks e, and the required reserve ratio set by the Fed rr.

Intuition Behind the Money Multiplier

To get a feel for what the money multiplier means, let’s construct a numerical example
with realistic numbers for the following variables:
rr = required reserve ratio = 0.10
C = currency in circulation = $1,200 billion
D = checkable deposits = $1,600 billion
ER = excess reserves = $2,500 billion
M = money supply (M1) = C + D = $2,800 billion

From these numbers we can calculate the values for the currency ratio c and the excess
reserves ratio e:
$1,200 billion
c = = 0.75
$1,600 billion
$2,500 billion
e = = 1.56
$1,600 billion
The resulting value of the money multiplier is
1 + 0.75 1.75
m = = = 0.73
0.1 + 1.56 + 0.75 2.41
The money multiplier of 0.73 tells us that, given the required reserve ratio of 10% on
checkable deposits and the behavior of depositors, as represented by c = 0.75, and
banks, as represented by e = 1.56, a $1 increase in the monetary base leads to a $0.73
increase in the money supply (M1).
An important characteristic of the money multiplier is that it is far less than the simple
deposit multiplier of 10 found earlier in the chapter. There are two reasons for this result.
First, although deposits undergo multiple expansion, currency does not. Thus, if some
portion of the increase in high-powered money finds its way into currency, this portion
does not undergo multiple deposit expansion. In our simple model earlier in the chapter,
we did not allow for this possibility, and so the increase in reserves led to the maximum
amount of multiple deposit creation. However, in our current model of the money multi-
plier, the level of currency does rise when the monetary base MB and checkable deposits D
increase, because c is greater than zero. As previously stated, any increase in MB that goes

M15_MISH8859_12_GE_C15.indd 405 26/07/18 4:58 PM

 406 P A R T 4    Central Banking and the Conduct of Monetary Policy

into an increase in currency is not multiplied, so only part of the increase in MB is available
to support checkable deposits that undergo multiple expansion. The overall level of mul-
tiple deposit expansion must be lower, meaning that the increase in M, given an increase in
MB, is smaller than indicated by the simple model earlier in the chapter.
Second, since e is positive, any increase in the monetary base and deposits leads to
higher excess reserves. When there is an increase in MB and D, the resulting increase
in excess reserves means that the amount of reserves used to support checkable depos-
its does not increase as much as it otherwise would. Hence the increase in checkable
deposits and the money supply are lower, and the money multiplier is smaller.
Prior to 2008, the excess reserves ratio e was almost always very close to zero (less
than 0.001), and so its impact on the money multiplier (Equation 5) was essentially
irrelevant. When e is close to zero, the money multiplier is always greater than 1, and
it was around 1.6 during that period. However, as we will see in the next chapter, non-
conventional monetary policy during the global financial crisis caused excess reserves
to skyrocket to over $2 trillion. Such an extraordinarily large value of e caused the
excess reserves factor in the money multiplier equation to become dominant, and so
the money multiplier fell to below 1, as discussed above.

Money Supply Response to Changes in the Factors

By recognizing that the monetary base is MB = MBn + BR, we can rewrite Equation 2 as
M = m * (MBn + BR) (6)
Now we can show algebraically all the results given in Summary Table 1, which
shows how the money supply responds to the changes in the factors.
As you can see from Equation 6, a rise in MBn or BR raises the money supply M
because the money multiplier m is always greater than zero. We can see that a rise in the
required reserve ratio rr lowers the money supply by calculating the value of the money
multiplier (using Equation 5) in our numerical example when rr increases from 10% to
15% (leaving all other variables unchanged). The money multiplier then becomes
1 + 0.75 1.75
m = = = 0.71
0.15 + 1.56 + 0.75 2.46
which, as we would expect, is less than 0.73.
Similarly, we can see that a rise in excess reserves lowers the money supply by
calculating the money multiplier when e is increased from 1.56 to 3.0. The money mul-
tiplier decreases from 0.73 to
1 + 0.75 1.75
m = = = 0.45
0.1 + 3.00 + 0.75 3.85
We can also analyze what happens in our numerical example when there is a rise
in the currency ratio c from 0.75 to 1.50. In this case, something peculiar happens.
Instead of falling, the money multiplier rises from 0.73 to
1 + 1.50 2.50
m = = = 0.78
0.1 + 1.56 + 1.50 3.20
At first glance, this result might seem counterintuitive. After all, a dollar of mon-
etary base that goes into currency only increases the money supply by one dollar,
whereas a dollar of monetary base that goes into deposits leads to multiple deposit
expansion that increases the money supply by a factor of 10. Thus it seems as though

M15_MISH8859_12_GE_C15.indd 406 26/07/18 4:58 PM

 C H A P T E R 1 5    The Money Supply Process 407

the shift from deposits to currency should lower the overall amount of multiple expan-
sion and hence the money supply. This reasoning is correct, but it assumes a small
value of the excess reserves ratio. Indeed, that is the case during normal times, when
the excess reserves ratio is near zero. However, in our current situation, in which the
excess reserves ratio e is abnormally high, when a dollar moves from deposits into cur-
rency, the amount of excess reserves falls by a large amount, which releases reserves to
support more deposits, causing the money multiplier to rise.8

A P P L I C AT I O N  uantitative Easing and the Money Supply,

Q
2007–2017
When the global financial crisis began in the fall of 2007, the Fed initiated lending pro-
grams and large-scale asset-purchase programs in an attempt to bolster the economy. By
2017, these purchases of securities had led to a quintupling of the Fed’s balance sheet
and an over 350% increase in the monetary base. These lending and asset-purchase pro-
grams, discussed further in Chapter 16, resulted in a huge expansion of the monetary
base and have been given the name “quantitative easing.” As our analysis in this chapter
indicates, such a massive expansion of the monetary base could potentially lead to a
large expansion of the money supply. However, as shown in Figure 1, when the mon-
etary base increased by more than 350%, the M1 money supply only rose by only 150%.
How can we explain this result using our money supply model?
The answer is that despite the huge increase in the monetary base, the money sup-
ply rose by much less because the money multiplier fell by around 50%. To explain this
decline in the money multiplier, let’s look at Figure 2, which shows the currency ratio
c and the excess reserves ratio e for 2007–2017. We see that the currency ratio had a
slight downward trend, which would have raised, not lowered, the money multiplier.
Instead, we have to look to the extraordinary rise in the excess reserves ratio e, which
climbed by more than a factor of 1,000 after September 2007.
What explains this substantial increase in the excess reserves ratio e? The Fed’s
actions created far more reserves than were needed for banks to meet their reserve
requirements. Banks were willing to hold the huge increases in excess reserves because,
after the Fed began paying interest on these reserves starting in 2008, the interest rate
on reserves often exceeded the rate at which the banks could lend them out in the
federal funds market. Because excess reserves had a very small or even negative cost,
banks were willing to tolerate a much higher excess reserves ratio e. As predicted by
our money supply model, the huge increase in e sharply lowered the money multiplier,
and so the money supply did not undergo that large an expansion, despite the huge
increase in the monetary base. ◆

8
All the above results can be derived more generally from the Equation 5 formula for m as follows. When rr or e
increases, the denominator of the money multiplier increases, and therefore the money multiplier must decrease.
As long as rr + e is less than 1 (as is usually the case), an increase in c raises the denominator of the money mul-
tiplier proportionally by more than it raises the numerator. The increase in c causes the money multiplier to fall.
On the other hand, when rr + e is greater than 1 (the current situation), an increase in c raises the numerator of
the money multiplier proportionally by more than it raises the denominator, so the money multiplier rises. For
more background on the currency ratio c, consult the third appendix to this chapter at www.pearson.com/mylab/
economics. Recall that the money multiplier in Equation 5 is for the M1 definition of money. Appendix 2 to
Chapter 15 at www.pearson.com/mylab/economics discusses how the multiplier for M2 is determined.
408 P A R T 4    Central Banking and the Conduct of Monetary Policy

Money Supply
Monetary base
($ billions)

5000

4000

3000

M1
2000

1000
Monetary Base

0
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

FIGURE 1 M1 and the Monetary Base, 2007–2017

The money supply rose by only 150% despite the increase in the monetary base of over 350%.
Source: Federal Reserve Bank of St. Louis FRED database: https://fred.stlouisfed.org/series/BOGMBASE; https://fred

.stlouisfed.org/series/M1SL.

2.00

1.75
Currency ratio (c)
1.50

1.25

1.00

0.75

0.50 Excess reserves

ratio (e)
0.25

0
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

FIGURE 2 Excess Reserves and Currency Ratio, 2007–2017

The currency ratio c was relatively steady during this period, whereas the excess reserves ratio e
rose by a factor of over 1,000.
Source: Federal Reserve Bank of St. Louis FRED database: https://fred.stlouisfed.org/series/EXCSRESNS; https://fred

.stlouisfed.org/series/CURRCIR; https://fred.stlouisfed.org/series/TCDNS.
 C H A P T E R 1 5    The Money Supply Process 409

SUMMARY
1. The three players in the money supply process are 5. The simple model of multiple deposit creation has seri-
the central bank, banks (depository institutions), and ous deficiencies. Decisions by depositors to increase
depositors. their holdings of currency or by banks to hold excess
2. Four items in the Fed’s balance sheet are essential to our reserves will result in a smaller expansion of depos-
understanding of the money supply process: the two lia- its than is predicted by the simple model. All three
bility items, currency in circulation and reserves, which players—the Fed, banks, and depositors—are impor-
together make up the monetary base; and the two asset tant in the determination of the money supply.
items, securities and loans to financial institutions. 6. The money supply is positively related to the nonbor-
3. The Federal Reserve controls the monetary base rowed monetary base MBn, which is determined by
through open market operations and extensions of open market operations, and the level of borrowed
loans to financial institutions and has better control reserves (lending) from the Fed, BR. The money sup-
over the monetary base than over reserves. Although ply is negatively related to the required reserve ratio,
float and Treasury deposits with the Fed undergo sub- rr, and excess reserves. The money supply is also nega-
stantial short-run fluctuations, which complicate con- tively related to holdings of currency but only if excess
trol of the monetary base, they do not prevent the Fed reserves do not vary much when there is a shift between
from accurately controlling it. deposits and currency. The model of the money sup-
ply process takes into account the behavior of all three
4. A single bank can make loans up to the amount of its
players in the money supply process: the Fed through
excess reserves, thereby creating an equal amount of
open market operations and setting of the required
deposits. The banking system can create a multiple
reserve ratio; banks through their decisions to borrow
expansion of deposits, because as each bank makes a
from the Federal Reserve and hold excess reserves; and
loan and creates deposits, the reserves find their way to
depositors through their decisions about the holding of
another bank, which uses them to make loans and cre-
currency.
ate additional deposits. In the simple model of multiple
deposit creation, in which banks do not hold on to excess 7. The monetary base is linked to the money supply using
reserves and the public holds no currency, the multiple the concept of the money multiplier, which tells us how
increase in checkable deposits (simple deposit multiplier) much the money supply changes when the monetary
equals the reciprocal of the required reserve ratio. base changes.

KEY TERMS
borrowed reserves, p. 394 money multiplier, p. 403 primary dealers, p. 391
discount rate, p. 390 multiple deposit creation, p. 395 required reserve ratio, p. 390
excess reserves, p. 390 nonborrowed monetary base, p. 394 required reserves, p. 390
float, p. 394 open market operations, p. 391 reserves, p. 390
high-powered money, p. 389 open market purchase, p. 391 simple deposit multiplier, p. 398
monetary base, p. 389 open market sale, p. 391

QUESTIONS
Select questions are available in MyLab Economics at 1. Classify each of these transactions as an asset, a liability,
www.pearson.com/mylab/economics. Unless otherwise noted, or neither for each of the “players” in the money supply
the following assumptions are made in all questions: The required process—the Federal Reserve, banks, and depositors.
reserve ratio on checkable deposits is 10%, banks do not hold any a. You get a $10,000 loan from the bank to buy an
excess reserves, and the public’s holdings of currency do not change. automobile.
410 P A R T 4    Central Banking and the Conduct of Monetary Policy

b. You deposit $400 into your checking account at the 8. “The Fed can perfectly control the amount of the mon-
local bank. etary base, but has less control over the composition
c. The Fed provides an emergency loan to a bank for of the monetary base.” Is this statement true, false, or
$1,000,000. uncertain? Explain.
d. A bank borrows $500,000 in overnight loans from 9. The Fed buys $100 million of bonds from the public
another bank. and also lowers the required reserve ratio. What will
e. You use your debit card to purchase a meal at a res- happen to the money supply?
taurant for $100. 10. Describe how each of the following can affect the
2. The First National Bank receives an extra $100 of money supply: (a) the central bank; (b) banks; and
reserves but decides not to lend out any of these (c) depositors.
reserves. How much deposit creation takes place for the 11. “The money multiplier is necessarily greater than 1.”
entire banking system? Is this statement true, false, or uncertain? Explain your
3. Suppose the Fed buys $1 million of bonds from the answer.
First National Bank. If the First National Bank and all 12. What effect might a financial panic have on the money
other banks use the resulting increase in reserves to multiplier and the money supply? Why?
purchase securities only and not to make loans, what 13. During the Great Depression years from 1930 to 1933,
will happen to checkable deposits? both the currency ratio c and the excess reserves ratio e
4. If a bank depositor withdraws $1,000 of currency from rose dramatically. What effect did these factors have on
an account, what happens to reserves, checkable depos- the money multiplier?
its, and the monetary base? 14. In October 2008, the Federal Reserve began paying
5. If a bank sells $10 million of bonds to the Fed to pay interest on the amount of excess reserves held by banks.
back $10 million on the loan it owes, what is the effect How, if at all, might this affect the multiplier process
on the level of checkable deposits? and the money supply?
6. If you decide to hold $100 less cash than usual and there- 15. The money multiplier declined significantly during the
fore deposit $100 more cash in the bank, what effect will period 1930–1933 and also during the recent finan-
this have on checkable deposits in the banking system if the cial crisis of 2008–2010. Yet the M1 money supply
rest of the public keeps its holdings of currency constant? decreased by 25% in the Depression period but increased
7. “The Fed can perfectly control the amount of reserves by more than 20% during the recent financial crisis.
in the system.” Is this statement true, false, or uncer- What explains the difference in outcomes?
tain? Explain.

APPLIED PROBLEMS
Select applied problems are available in MyLab Economics b. The central bank sells securities to the commercial bank.
at www.pearson.com/mylab/economics. Unless otherwise c. The commercial bank repays the loan to the central bank.
noted, the following assumptions are made in all of the applied
18. If the Fed lends five banks a total of $100 million but
problems: The required reserve ratio on checkable deposits is
10%, banks do not hold any excess reserves, and the public’s depositors withdraw $50 million and hold it as cur-
holdings of currency do not change. rency, what happens to reserves and the monetary
base? Use T-accounts to explain your answer.
1
6. If the Fed sells $2 million of bonds to the First National
Bank, what happens to reserves and the monetary base? 19. Using T-accounts, show what happens to checkable
Use T-accounts to explain your answer. deposits in the banking system when the Fed lends
$1 million to the First National Bank.
1
7. For the following operations, what happens to the
central bank’s and commercial bank’s reserves and 20. Using T-accounts, show what happens to checkable
the monetary base? Use T-account to show changes in deposits in the banking system when the Fed sells
balances. Assume that the amount is $10 million. $2 million of bonds to the First National Bank.
a. The central bank provides loan to commercial bank. 21. If the Fed buys $1 million of bonds from the First
National Bank, but an additional 10% of any deposit
 C H A P T E R 1 5    The Money Supply Process 411

is held as excess reserves, what is the total increase in a. Calculate the money supply, the currency deposit ratio,
checkable deposits? (Hint: Use T-accounts to show what the excess reserve ratio, and the money multiplier.
happens at each step of the multiple expansion process.) b. Suppose the central bank conducts an unusually
2
2. If reserves in the banking system increase by $1 billion large open market purchase of bonds held by banks
because the Fed lends $1 billion to financial institutions, of $1,300 billion due to a sharp contraction in the
and checkable deposits increase by $9 billion, why isn’t economy. Assuming the ratios you calculated in part (a)
the banking system in equilibrium? What will continue to remain the same, predict the effect on the money supply.
happen in the banking system until equilibrium is reached? c. Suppose the central bank conducts the same open
Show the T-account for the banking system in equilibrium. market purchase as in part (b), except that banks
2
3. Suppose the central bank of your country increases choose to hold all of these proceeds as excess
reserves by purchasing $1 million worth of bonds reserves rather than loan them out, due to fear of a
from banks and that the banking system in your econ- financial crisis. Assuming that currency and deposits
omy is in equilibrium. What will happen to the level remain the same, what happens to the amount of
of checkable deposits? Use T-accounts to explain your excess reserves, the excess reserve ratio, the money
answer. supply, and the money multiplier?
4. If the Fed sells $1 million of bonds and banks reduce
2 d. Following the financial crisis in 2008, the Federal
their borrowings from the Fed by $1 million, predict Reserve began injecting the banking system with
what will happen to the money supply. massive amounts of liquidity, and at the same time,
5. Suppose that the required reserve ratio is 9%, currency in
2 very little lending occurred. As a result, the M1
circulation is $620 billion, the amount of checkable depos- money multiplier was below 1 for most of the time
its is $950 billion, and excess reserves are $15 billion. from October 2008 through 2011. How does this
scenario relate to your answer to part (c)?

DATA ANALYSIS PROBLEMS

The Problems update with real-time data in MyLab Economics c. Assuming a required reserve ratio rr of
and are available for practice or instructor assignment. 11%, calculate the value of the money
1. 
Go to the St. Louis Federal Reserve FRED database, multiplier m.
and find the most current data available on Currency 2. 
Go to the St. Louis Federal Reserve FRED database,
(CURRNS), Total Checkable Deposits (TCDNS), and find data on the M1 Money Stock (M1SL) and
Total Reserves (RESBALNS), and Required Reserves the Monetary Base (AMBSL).
(RESBALREQ). a. Calculate the value of the money multiplier
a. Calculate the value of the currency deposit using the most recent data available and the
ratio c. data from five years prior.
b. Use RESBALNS and RESBALREQ to cal- b. Based on your answer to part (a), how
culate the amount of excess reserves, and much would a $100 million open market
then calculate the value of the excess purchase of securities affect the M1 money
reserve ratio e. Be sure the units of total and supply today and five years ago?
required reserves are the same when you do
the calculations.

WEB EXERCISES
1. Go to http://www.federalreserve.gov/boarddocs/hh/ 2. Go to http://www.federalreserve.gov/releases/h6/hist/
and find the most recent monetary policy report of the and find the historical report of M1 and M2 by clicking
Federal Reserve. Read the first two parts of the report, on the “Data Download Program.” Compute the growth
which summarizes Monetary Policy and the Economic rate of each aggregate over each of the past three years.
Outlook. Write a one-page summary of each of these Does it appear that the Fed has been increasing or
parts of the report. decreasing the rate of growth of the money supply? Is