Quick Check from Yesterday

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Quick Check from Yesterday

• What makes up the money supply
• Money in circulation and held by banks and other
  financial institutions
• What is fiat money?
• Medium of exchange ordered valuable by the
  government
• U.S. currency

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Money Supply Activity
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Suppose Jack purchased 100 beans at the market.
When he plants those beans at home, the resulting
beanstalk produces five times as many beans as he
planted.How many beans grew on the beanstalk?
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• 100 beans x 5 times 500 beans produced
• Do you think there is a way for money to be
  created in the same way?

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100,000 Gold Certificate
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What is the Money Supply?

• Total amount of money available to the economy to
  purchase goods and services

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What happens to deposits?

• Banks hold onto some of the deposited money as
  reserves but then lend the rest of it.
• Charge a higher interest rate on the loan than
  they give on the deposit.

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Money Supply Activity

• Assume that the required reserve is 20 of the
  deposit.
• Roles
• Keeper of the Money Supply
• Bankers (5)
• Borrowers (4)
• Mathematician

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Money Multiplier

• money multiplier 1
• required reserve ratio
• 1. What is the money multiplier for our example
  with a required reserve ratio of 20?

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• 2. With the 100,000 initial deposit, excess
  reserves were 100,000 - 20,000 80,000. What
  is the total amount the money supply could expand
  in our example?
• 3. If we continued tracing and cutting the
  gigantic bill from the activity until the money
  creation process was finished, how much total
  space would we need for the completed tracings?

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• 4. If the Federal Reserve raised the required
  reserve ration from 20 to 25, how would the
  activity have been different?
• 5. If we had used the actual maximum US required
  reserve ratio of 10, how would the activity have
  been different?
• 6. If money is created when banks make loans, how
  is money destroyed?

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• You were recently walking by the US Mint in
  Philadelphia and you heard one tourist say the
  following to another tourist
• All of the money in the US is created in this
  mint and the US Mint in Denver, CO. It sure is
  amazing to think that every dollar you have ever
  saved or spent was created in either this
  building or the one in Denver!
• Write one-paragraph explaining why the tourists
  statement is inaccurate.

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Keeper of the Money Supply
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Banker
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Banker
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Banker
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Banker
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Banker
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Borrower
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Borrower
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Borrower
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Borrower
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Mathematician