Initially, money is created by Fed by printing bills and coins. But, in an economy there is much more money than the currency in calculation. If the reserve requirement is 20% and the bank loans out all deposits minus required reserve, a $100 deposit will create $5000. How is it possible? Please see the following table:
Bank Gets Bank Keeps
(Reserve Ratio: 20%) Bank Loans (80%) = Person Borrows
Initial deposit 10,000 2,000 8,000
Second stage 8,000 1,600 6,400
Third stage 6,400 1,280 5,120
Fourth stage 5,120 1,024 4,096
Fifth stage 4,096 819 3,277
Sixth stage 3,277 656 2,621
Seventh stage 2,621 524 2,097
All other stages 10,486 2,097 8,389
TOTAL 50,000 10,000 40,000
Words: 83
A MONETARY SNAPSHOT (data in $billion)
Wednesday Averages
Repos Discount Window Lending
Float Deposits at Federal Reserve Banks
July 4 - Sept. 5, 2001 $27,298 $59 $720 $19,009
September 12, 2001 61,005 45,528 22,929 102,704
September 19, 2001 39,600 2,587 2,345 13,169
Source: C. J. Neely, "September 11, 2001," Monetary Trends, Federal Reserve Bank of St. Louis, November 2001.
Questions:
1. Which of the tools of monetary policy did the Fed use in the emergency?
2. Why did the grounding of aircraft cause the Fed to act?
3. The chapter lists the duties the Fed must perform. Which duties are mentioned in the article?
4. What forms did liquidity take?
5. Do you think the Fed acted correctly?
6. What are the three stages of a financial crisis? Briefly explain how each stage played out differently during the Great Depression and the Crisis of 2008.
7. Explain the relationship between one's beliefs about whether the minimum jobs program presented in the chapter actually solves the unemployment problem and one's normative view of responsibility for unemployment.