Introduction to Macroeconomics Econ 104a,c,
Worksheet 6 – Money, the Fed and Monetary Policy
Due in class or on moodle Friday Nov 1 . st
1. What makes up the demand for Money? (3)
• A Transaction Demand – This is the only demand recognized by Classical Economists.
It is when the amount of money balances indicates that people want to buy goods and services.
• Speculative Demand – Comes from peoples’ desires to maximize their returns on the remaining
balance after completing their transactions and precautionary demands. It is inversely
proportional to the interest rate.
• Precautionary Demand – Any money reserved to meet unforeseen expenses.
2. What is money in the U.S.?
• M1 – Physical currency (i.e. cash, checking account deposits, etc..). Most liquid form of
• M2 – All M1 forms of money, and additionally such things as savings deposits, non-
institutional money-market funds, and times deposits.
3. Are Credit Cards Money? Why or why not?
• No, because the money being used to pay for something when using a credit card is not actually
money. It is just a placeholder in the form of credit that can be payed for in the form of a bill.
This bill, payed at a later time, is a form of money.
4. How do banks “make” money, that is, increase the money supply? Use words.
• Banks make money by taking a percentage of the money people deposit into bank accounts
(regulated by the FED – about 90%) and invest that money in businesses/interests that they
think will grow. To this effect, banks can make money for themselves. Banks can also give out
loans (with interest), which also generates income.
5. If the Supply of reserves is 100 million, the reserve requirement is .1 (10%), and the banks are
fully lent out, what is the total amount of loans? What is the total money supply?
• Excess reserves = reserves – req. reserves (rr) = $90 mill
rr = deposits * reserve requirement = $10 mill
Loans = 1/(rr) * excess reserves = $900 mill
Total $ Supply = reserves + loans = $1000 mill = $1 bill
6. Who/What is the FED? Give Details. Who gets to make decisions at the FED? How do they get
• The FED is the Fede