You’ve learned about money, its connection to inflation, money supply and the monetary multiplier, banking and money creation. Try to apply your understanding of these concepts in analyzing our current situation: During the crisis and until now, the Fed b

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You’ve learned about money, its connection to inflation, money supply and the monetary multiplier, banking and money creation. Try to apply your understanding of these concepts in analyzing our current situation: During the crisis and until now, the Fed bought a lot of securities from banks and other financial institutions. This made some people fear that the Fed’s actions would spark inflation. Yet, inflation hasn’t really shown up in our economy (and the Fed has been doing this for five years now). Explain why, by answering the following questions: Discuss briefly the connection between money supply and inflation. When the Fed buys securities in the open market, what happens to banks’ reserves? What tends to happen to money supply, as a consequence? Explain briefly your answer to the last question. Let’s now look at the facts (data). FRED (Links to an external site.) is a good source of economic data, especially about money. Click on the “popular series” tab in the FRED homepage. Look at the “CPI for all urban consumers” series first. Remember that inflation is the rate of increase in CPI. Eyeballing the graph, would you say that the CPI accelerated since 2008 or not? Next, look at the “M2 money stock” series (make sure that you’re still in the “popular series” page). Has M2 increased faster since 2008? Let’s try to understand why M2 is showing the pattern that it is. What might be the explanation for it? To see facts about the answer, type “excess reserves of depository institutions” in the FRED searchbox, and briefly discuss the pattern you see for this series, starting around 2008. Look at the “Velocity of M2” series. What happened to it since 2008? Does this pattern support the idea that inflation should rise, or not? Explain briefly. [If you forgot what “velocity of money” means, please review the “Chapter 17 Highlights” and focus on the Equation of Exchange. Let’s now take a look at the question of whether or not cash is dead. View the presentation “Cash Is Dead! Long Live Cash! (Links to an external site.)”. Briefly explain this paradox: Why have people’s cash-holdings continued to rise, despite the many alternatives to cash that are now in use? Are debit card balances part of M1? How about credit card balances? Explain each answer briefly. Some people believe that cash will never go away, because there are some sectors of society that will continue to insist on cash for transactions. Discuss one such sector. Let’s now take a look at Zimbabwe, a nation that went through severe hyperinflation recently, in The Economist’s “In Dollars They Trust (Links to an external site.)” (Apr27’13, p.71). List and discuss four (4) major concepts that you’ve learned in this module that are applied or illustrated in this article. You have now learned the basics of fiscal policy and monetary policy. Consider expansionary policy. What is one weakness of tax-cut, which could render it ineffective? What is one weakness of easy-money policy, which could render it ineffective?

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