Material Detail

Students evaluate the total potential expansion of the money supply and availability of credit by using the simple equation of exchange. After considering recent changes in Federal Reserve policy that allows the Federal Reserve to pay interest on excess bank reserves, students predict the impact of the policy change on excess reserves held, and the subsequent effect of the policy on the Velocity of Circulation. They read two articles published by the Federal Reserve Bank of San Francisco as background to inform their predictions. After examining FRED data on excess reserves and the velocity of circulation (using M2 as the measure of the money supply) they are asked to evaluate the effect of the policy change and whether their prediction is consistent with the actual data.

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