Money, Banking, and International Financehave only $10 in your checking account, then this check does not clear. That is why the Fed
needs permission to lower the bank’s reserves to clear the check; instead of automatically doing
it. We display the final transaction below:
The Federal Reserve
Assets Liabilities
- $1,000 CIPC – $1,000 Reserves at your bank
Your Bank
Assets Liabilities
- $1,000 Reserves at the Fed – $1,000 Your checking account
Usually the float changes predictably during the mid-month because people pay their bills.
Furthermore, the float changes in December because people write checks to buy Christmas
presents or in April when people pay their taxes. Moreover, bad weather and transportation
strikes can cause the float to soar expectantly as the Fed experiences delays in check collections.
Consequently, an increase in the float expands both the bank reserves and money supply. Then
the Fed must nullify the float by selling U.S. government securities that reduce the money
supply.
Many banks join a clearinghouse that can clear checks and wire transfers without using a
central bank. For example, a large bank in New York is the clearinghouse between two small
banks. One bank is May Bank in Malaysia while the other is First National Bank in Indiana.
Both banks have accounts at the clearinghouse. If a person transfers money from Malaysia to
Indiana electronically, then the clearinghouse reduces the account for the Malaysian bank and
adds the amount of the wire transfer to the Indiana's bank. Consequently, banks and central
banks clear checks and wire transfers similarly.
Changes in the Monetary Base
If the Fed’s balance sheet changes, subsequently, both the monetary base and money supply
change. At first, this process seems complex, but economists use a trick. First, we list the Fed’s
total assets in Equation 2 and total liabilities in Equation 3.
Total Assets = U.S. gov. securities + discount loans + gold certificates + SDRs + CIPC (2)
Total Liabilities = Currency outstanding (C) + deposits by depository institutions (D) +
U.S. Treasury deposits + Foreign and other deposits + DACI (3)Next, we substitute the monetary base formula into Equation 3 because the monetary base
equals deposits held by depository institutions plus currency in circulation, or B = D + C. After
substituting the monetary base into Equation 3 , we yield Equation 4.