Revised: 11/20/2004, 12:34:53 AM

Also see spreadsheet: "The Fed and the Supply of Money".

The Equation for the Money Supply

13)

Equation 13) tells the following story: If you want to know the money supply of the United States, you only need to know how much currency has been put into circulation by the government, the dollar value of the T-bills and other assets purchased and owned by the Fed, the total dollar value of all loans made by the Fed at the discount window, the reserve requirements set by the Fed for demand deposits and for time deposits, the prudence-determined reserve ratios desired by the banks, and last but not least, the non-bank public's desired ratios of currency-to-demand-deposits and currency-to-time-deposits. If all these variables are known, the money supply of the United States is a simple matter of arithmetic via Equation 13).

I wish to inform you that a spreadsheet containing Equation 13) can be downloaded from my web-site. Be sure to download the version for Honors macroeconomics, not regular macroeconomics.  This is the exact address: http://www2.austincc.edu/gandron/Course_Information_Geoffrey_T_Andron.html
Or, start at my main page http://www2.austincc.edu/gandron/ and work your way down to it. Once you find it, download it to a floppy. You will need it for the homework problems.

Four Homework Problems

1) Make guesses of all the variables on the right side of Equation 13), the money supply equation. Plug them into the spreadsheet and print out the spreadsheet or write down the calculated money supply and your guesses of the variables.

Hints: The hardest part of this is getting the data you need. There are three sources you can use. First, I have given you a recent balance sheet of the FED attached hereto, and also a recent release about Reserve Requirements. Second, every Friday's Wall Street Journal has a small table called Federal Reserve Data. (On Friday Nov. 19, 2004 this was on page C5.) Third, you can browse the St. Louis Fed web site starting here:

http://research.stlouisfed.org/fred2/categories/24

For example, total borrowings by banks from the FED, L_f, can be found at:

http://research.stlouisfed.org/fred2/series/BORROW/50

Other hints: 1) You will find some data labeled "sa" and some "nsa", which respectively refer to "seasonally adjusted" and "not-seasonally adjusted". Be consistent, but use either type of figures. 2) Notice that specie (coined money) is produced at the National Mint by the U.S Treasury, but most paper money outstanding (leaving aside counterfeiters) was printed by the Fed and is called Federal Reserve Notes. (Look at a dollar bill). You need to include both in your total of currency. Also, be aware that the coins or currency held by the FED cannot be counted as part of currency issued and spent into circulation, since much of it has never been held by banks or by the non-bank public, hence cannot be counted as part of , the total of currency ever issued by issued. (The FED keeps some extra currency in case it is ever wanted or needed by banks during a financial emergency.)

2) Compare your calculated value for the money supply just complete in question 1) to the actual money supply as calculated by the FED. (Hint: Again you can use either the Friday WSJ or the St. Louis Fed web-site to get your data. Notice there are several different measures of the money supply, depending on what items you decide to include. I suggest using M1, since it is readily available and fairly close to the kind of measure we want.)

3) Which of your estimated variables would you like to change, and by how much, so your calculated value of M1 will exactly equal the actual value? Is it reasonable to suspect errors in your guesses of the various variables used in your calculation?

The next question will be due after exam 3:

4) Suppose interest rates rise to roughly 4% from a current level of roughly 3%. Exactly by what percentage, in your opinion, will the variables and change? (Remember there is no easy answer to this. Make an intelligent guess.) Now recalculate the money supply, incorporating these changes in variables. If you are correct, what will be the resulting percentage change in the money supply caused by this increase in interest rates?

General advice. Please remember that you will not be graded for doing a bad job on this assignment. It is a real challenge to learn enough about real-world data to be sure what the data is, and which data is relevant. Be willing to make wild guesses. Have fun! See what you can learn, but don't spend too much time on it!

Reserve Requirements in early 2003.

For immediate release

The Federal Reserve Board on Thursday announced the annual adjustments in the amount of net transaction accounts used in the calculation of reserve requirements and the cutoff level used to determine the detail and frequency of deposit reporting.

All depository institutions must retain a percentage of certain types of deposits in the form of vault cash, or as a deposit in a Federal Reserve Bank, or a pass-through account at a correspondent institution. Reserve requirements currently are assessed on the depository institution's net transaction accounts (mostly checking accounts).

For net transaction accounts in 2003, the first $6.0 million, up from $5.7 million in 2002, will be exempt from reserve requirements. A 3 percent reserve ratio will be assessed on net transaction accounts over $6.0 million to and including $42.1 million, up from $41.3 million in 2002. A 10 percent reserve ratio will be applied above $42.1 million.

Federal Reserve Banks

Combined Statements of Condition

December 31, 2003 and 2002

(in billions of dollars)

Assets	2003	2002
Gold certificates	11.039	11.039
Special drawing rights certificates	2.2	2.2
Coin	0.722	0.988
Items in process of collection	7.793	10.291
Loans to depository institutions	0.062	0.04
Securities purchased under agreements to resell (tri-party)	43.75	39.5
U.S. Government and federal agency securities, net	675.569	639.125
Investments denominated in foreign currencies	19.868	16.913
Accrued interest receivable	5.064	5.47
Bank premises and equipment, net	2.117	2.044
Other assets	3.303	3.367
	---------------
Total Assets	771.487	730.977
	=========
Liabilities and Capital
Liabilities
Federal Reserve notes outstanding, net	689.757	654.273
Securities sold under agreements to repurchase	25.652	21.091
Deposits
Depository institutions	23.058	22.541
U.S. Treasury, general account	5.723	4.42
Other deposits	0.394	0.444
Deferred credit items	7.582	9.459
Interest on Federal Reserve notes due U.S. Treasury	0.428	0.838
Accrued benefit costs	0.956	0.915
Other liabilities	0.234	0.236
	---------------
Total liabilities	753.793	714.217
	---------------
Capital
Capital paid-in	8.847	8.38
Surplus	8.847	8.38
	---------------
Total Capital	17.694	16.76
	---------------
Total liabilities and capital	771.487	730.977