How Central Banks Measures Money
1. Currency in Circulation Calculation:
Given the following data:
– Total cash held by the public: $800 million
– Currency held by the banking system: $200 million
Question:
What is the total currency in circulation?
Solution:
Currency in circulation = Cash held by the public + Currency
held by the banking system
Answer:
$800 million + $200 million = $1,000 million
2. Bank Reserves Calculation:
A central bank reports the following data:
– Total reserves held by commercial banks: $500 million
– Required reserves: $400 million
Question:
What are the excess reserves held by the banks?
Solution:
Excess reserves = Total reserves – Required reserves
Answer:
$500 million – $400 million = $100 million
3. Total Reserves Contribution to Monetary Base:
If the total reserves held by the banking system are $300
million, and there is no excess reserve requirement, calculate the contribution
of reserves to the monetary base.
Solution:
Contribution to monetary base = Total reserves
Answer:
$300 million
4. Calculating the Monetary Base from Components:
Given the following data:
– Currency in circulation: $700 million
– Total bank reserves: $300 million
Question:
What is the total monetary base?
Solution:
Monetary base = Currency in circulation + Bank reserves
Answer:
$700 million + $300 million = $1,000 million
5. Monetary Base Calculation with Vault Cash:
Suppose:
– Currency in circulation: $600 million
– Vault cash (currency held by banks): $150 million
– Reserves at the central bank: $250 million
Question:
What is the total monetary base?
Solution:
Monetary base = Currency in circulation + Vault cash +
Reserves at the central bank
Answer:
$600 million + $150 million + $250 million = $1,000 million
1. M1 Calculation (Currency and Demand Deposits):
Given the following data:
– Currency in circulation: $900 million
– Demand deposits at commercial banks: $1,200 million
– Traveler’s checks: $100 million
Question:
What is the value of M1?
Solution:
M1 = Currency in circulation + Demand deposits + Traveler’s
checks
Answer:
$900 million + $1,200 million + $100 million = $2,200
million
2. M2 Calculation (M1 and Near-Money):
You are given the following information:
– M1: $3,000 million
– Savings deposits: $2,500 million
– Small time deposits (less than $100,000): $1,000 million
– Retail money market mutual funds: $500 million
Question:
What is the value of M2?
Solution:
M2 = M1 + Savings deposits + Small time deposits + Retail
money market mutual funds
Answer:
$3,000 million + $2,500 million + $1,000 million + $500
million = $7,000 million
3. M3 Calculation (M2 and Large Time Deposits):
Given the following data:
– M2: $5,000 million
– Large time deposits: $2,000 million
– Institutional money market mutual funds: $1,000 million
– Repurchase agreements and Eurodollars: $500 million
Question:
What is the value of M3?
Solution:
M3 = M2 + Large time deposits + Institutional money market
mutual funds + Repurchase agreements and Eurodollars
Answer:
$5,000 million + $2,000 million + $1,000 million + $500
million = $8,500 million
4. Calculating Contribution to M1:
Suppose the following:
– Currency in circulation: $600 million
– Demand deposits: $900 million
– Other checkable deposits: $300 million
Question:
What is the total contribution of these components to M1?
Solution:
M1 = Currency in circulation + Demand deposits + Other
checkable deposits
Answer:
$600 million + $900 million + $300 million = $1,800 million
5. Difference Between M2 and M1:
If:
– M2 is $6,500 million
– M1 is $4,000 million
Question:
What is the value of near-money components in M2 (i.e., the
difference between M2 and M1)?
Solution:
Near-money = M2 – M1
Answer:
$6,500 million – $4,000 million = $2,500 million
6. M1 Calculation Including Traveler’s Checks:
Consider the following data:
– Currency in circulation: $700 million
– Demand deposits: $1,000 million
– Traveler’s checks: $50 million
– Other checkable deposits: $250 million
Question:
What is the value of M1?
Solution:
M1 = Currency in circulation + Demand deposits + Traveler’s
checks + Other checkable deposits
Answer:
$700 million + $1,000 million + $50 million + $250 million =
$2,000 million
7. Savings Deposits Contribution to M2:
Given:
– M1: $2,500 million
– Savings deposits: $3,000 million
Question:
What is the contribution of savings deposits to M2?
Solution:
Contribution of savings deposits = Savings deposits (part of
M2)
Answer:
$3,000 million
8. Large Time Deposits in M3:
If the following data are given:
– M2: $8,000 million
– Large time deposits (greater than $100,000): $2,500
million
– Institutional money market mutual funds: $1,200 million
Question:
What is the total value of M3?
Solution:
M3 = M2 + Large time deposits + Institutional money market
mutual funds
Answer:
$8,000 million + $2,500 million + $1,200 million = $11,700
million
9. Calculating M2 Excluding M1 Components:
You are provided with the following data:
– M1: $3,800 million
– Small time deposits: $600 million
– Savings deposits: $1,700 million
– Retail money market mutual funds: $300 million
Question:
What is the value of M2 excluding M1 components?
Solution:
M2 excluding M1 components = Small time deposits + Savings
deposits + Retail money market mutual funds
Answer:
$600 million + $1,700 million + $300 million = $2,600
million
10. Impact of Removing Currency on M1:
Suppose the following:
– Current M1 is $4,200 million, which includes $1,200
million in currency in circulation.
– You remove $200 million of the currency in circulation.
Question:
What is the new value of M1?
Solution:
New M1 = Current M1 – Amount of currency removed
Answer:
$4,200 million – $200 million = $4,000 million
