How Central Banks Measures Money

 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