Appendix 1
Figure 2
Worksheet #1: Primary Changes in the Money Supply

Situations:

1	The Government decides to build a new school at the cost of $1,000
It borrows this money from the Central Bank to pay Construction Firm

Change in the money supply	______________________________________

2	Construction Firm pays its employees a total of $500

Change in the money supply	______________________________________

3	Construction Firm employees pay tax to the Internal Revenue Service – total of $150

Change in the money supply	______________________________________

4	These construction workers and their families buy groceries from the Supermarket – total spent $300 = income of Supermarket

Change in the money supply	______________________________________

5	Supermarket pays its employees a total of $200

Change in the money supply	______________________________________

6	Supermarket employees pay tax to the Internal Revenue Service – total of $60

Change in the money supply	______________________________________

7	Supermarket employees buy groceries at the Supermarket – total spent $120 = income for Supermarket

Change in the money supply	______________________________________

8	Firms pay company tax to the Internal Revenue Service on 7 March.  Construction Firm pays $300 and Supermarket pays $150

Change in the money supply	______________________________________

9	Government sells Bonds to the public.  Households (employees of Construction firm buy $50 worth, while Supermarket households buy $20 worth)

Change in the money supply	______________________________________

10	Government sells Government Stock to the public. Construction Firm buys $200 worth and Supermarket buys $70 worth for their pension funds.

Change in the money supply	______________________________________

11	   Government redeems $200 worth of Government stock at maturity ($50 to each group)

Change in the money supply	______________________________________

Overall there is an INCREASE / DECREASE in the primary money supply after these transactions

How much is it?	__________________________________________________

Additional questions:

If the Government runs a budget deficit of $50 million, funded by borrowing from the Central Bank, what is the primary change in the money supply?  Explain your answer

If the Government runs a budget surplus of $50 million, what is the primary change in the money supply?  Explain your answer

If the Government runs a balanced budget what is the primary change in the money supply?  Explain your answer

Complete the summary diagram by naming the transactions that cause primary changes in the money supply:

	Decrease in MS					Increase in MS

__________________________		_____________________________

__________________________		_____________________________

Central Bank

__________________________	  	_____________________________

__________________________		_____________________________

__________________________		_____________________________

Name the situations that result in no primary change in the money supply:

1	_______________________________________________________________

2	_______________________________________________________________

3	_______________________________________________________________

Tennis Balls
Product Curves

Total Cost Curves

Tennis Ball Average Cost Curves

Appendix 1 - Continue
Figure 3
Worksheet #2: Secondary Changes in the Money Supply

1	$200m new money created by the primary increase in the money supply flows into the Registered Bank.  Use the required reserve ratio (R) to show the effect of the lending process on the money supply as this new money works through the banking system.

2	Total each column and write the answer in the space provided (Total 1)

Registered Bank	 R=0.1 (0.2, 0.25, 0.50) 

DEPOSITS	LOANS	RESERVES	

			

			

Total 1  ________________	___________________	____________________

3	Calculate the credit multiplier. Use it and the original deposit ($200m) to calculate the total change in the money supply, loans and reserves that would occur if the bank continued all the lending rounds. Enter these totals in the spaces below. (Total 2)

Total 2  ________________	___________________	____________________

Comment:

Extension Exercise

INITIAL REGISTERED BANK BALANCE SHEET	$	R = 0.1

Reserves		1000			Transaction Accounts		10,000
Loans			9000

Total			10,000			Total					10,000

As a result of the transactions that have taken place in the economy there is a primary increase in the money supply of $200.  Complete the balance sheet below to show the impact of this increase after the credit creation process of the registered bank that leaves the registered bank fully loaned up.

REGISTERED BANK BALANCE SHEET	$	R = 0.1

Reserves						Transaction Accounts		
Loans				

Total							Total					

Break

INITIAL REGISTERED BANK BALANCE SHEET	$	R = 0.2

Reserves		1000			Transaction Accounts		5,000
Loans			4000

Total			5,000			Total					5,000

As a result of the transactions that have taken place in the economy there is a primary increase in the money supply of $200.  Complete the balance sheet below to show the impact of this increase after the credit creation process of the registered bank that leaves the registered bank fully loaned up.

REGISTERED BANK BALANCE SHEET	$	R = 0.2

Reserves					Transaction Accounts		
Loans				

Total						Total						
Break

INITIAL REGISTERED BANK BALANCE SHEET	$	R = 0.25

Reserves		1000			Transaction Accounts		4,000
Loans			3000

Total			4,000			Total					4,000

As a result of the transactions that have taken place in the economy there is a primary increase in the money supply of $200.  Complete the balance sheet below to show the impact of this increase after the credit creation process of the registered bank that leaves the registered bank fully loaned up.

REGISTERED BANK BALANCE SHEET	$	R = 0.25

Reserves					Transaction Accounts		
Loans				

Total						Total						

Break

INITIAL REGISTERED BANK BALANCE SHEET	$	R = 0.5

Reserves		1000			Transaction Accounts		2,000
Loans			1000

Total			2,000			Total					2,000

As a result of the transactions that have taken place in the economy there is a primary increase in the money supply of $200.  Complete the balance sheet below to show the impact of this increase after the credit creation process of the registered bank that leaves the registered bank fully loaned up.

REGISTERED BANK BALANCE SHEET	$	R = 0.5

Reserves							Transaction Accounts		
Loans				

Total