Fifth Edition Economics A Contemporary Introduction William A. McEachern

1. Fifth EditionEconomics A Contemporary Introduction William A. McEachern Banking and the Money Supply

2. Exhibit 1: Alternative Measures of the Money Supply (January 1999) Source: Federal Reserve Statistical Release at http://www.bog.frb.fed.us/releases/H6/current/. Banking and the Money Supply

3. AssetsLiabilities and Net Worth Building and furniture $ 80,000 Net worth $100,000 Stock in district Fed 20,000 Total $100,000 Total $100,000 Exhibit 2: Home Bank’s Balance Sheet Banking and the Money Supply

4. AssetsLiabilities and Net Worth Cash $1,000,000 Checkable deposits $1,000,000 Building and furniture $ 80,000 Net worth $100,000 Stock in district Fed 20,000 Total $1,100,000 Total $1,100,000 Exhibit 3: Home Bank’s Balance Sheet After $1,000,000 Deposit Banking and the Money Supply

5. AssetsLiabilities and Net Worth Loans + 1,000 Checkable deposits + 1,000 Exhibit 4: Changes in Home Bank’s Balance Sheet After Home Bank Lends You $1,000 Banking and the Money Supply

6. AssetsLiabilities and Net Worth Loans + 900 Checkable deposits + 900 Exhibit 5: Changes In College Bank’s Balance Sheet After the Bank Makes a $900 Loan Banking and the Money Supply

7. AssetsLiabilities and Net Worth Loans + 810 Checkable deposits + 810 Exhibit 6: Change in Merchants Trust’s Balance Sheet After an $810 Loan to English Major Banking and the Money Supply

8. Exhibit 7: Summary of the Credit Expansion Process Resulting from the Fed’s Purchase of a $1,000 U.S. Government Bond from Home Bank Increase in Increase in Required Increase in Checkable Deposits Reserves LoansBank (1) (2) (3) = (1)–(2) 1. College Bank $ 1,000 $ 100 $ 900 2. Merchants Trust 900 90 810 3. Fidelity Bank 810 81 729 All remaining rounds 7,290 729 6,561 Total $10,000 $1,000 $9,000 Banking and the Money Supply