From the FinTimes today, Jean-Claude Trichet, president of the European Central Bank, writes:

Over the next two days, the European Central Bank will host a conference to discuss the role of money in monetary policymaking. At present, the dominant academic view seems to be that monetary aggregates should have no part in monetary policy decisions. From this perspective, money does not deserve to be central to one of the two “pillars” of the ECB’s monetary policy strategy. I do not share this view. In this I follow Friedrich Hayek, who wrote in The Pure Theory of Capital: “It is self-contradictory to discuss a process [inflation] which could not take place without money and at the same time to assume that money is absent or has no effect.

The value of a dollar in New York City is 76.2 cents...












...according to New York Magazine.

Does money demand include demand for the two dollar bill? I haven't seen more of that denomination, but it is apparently experiencing a resurgence in demand for exchange. See this article from yesterday's Washington Post.

In 2005, depository institutions ordered $122 million in $2 notes, according to Federal Reserve statistics. That is more than double the average amount ordered from 1991 to 2000.

...with banking and currency experts not certain what is fueling the surge. A few possibilities are inflation, the introduction of the Sacagawea $1 coin in 2000, and even, according to some, immigration.

Regardless of the reason, anecdotal evidence shows that at the local level, vendors and customers are getting more comfortable with $2 bills.

One group that has embraced the note is the exotic-dancing industry. Strip clubs hand out $2 bills when they give customers their change, and the bills end up in dancers' garters and bartenders' tip jars.

"The entertainers love it because it doubles their tip money," said Angelina Spencer, a former stripper and the current executive director of the Association of Club Executives, an adult nightclub trade group.

In addition to the inflation factor, Robert Hoge of the American Numismatics Society thinks $2 bill demand may be getting help from immigration flows, particularly from Canada and Europe, where currency denominated in twos is common.

Peter Morici, professor at the Robert H. Smith School of Business at the University of Maryland, thinks that with the introduction of the Sacagawea, named for a famous Native American woman, people are beginning to realize an inconvenience of $1 bills. "In order to have a successful $2 bill, you have to have a successful $1 coin," he said.

The obvious implication here is that the dollar just isn't worth what it used to be in terms of purchasing power, thanks to inflation. But it made me wonder...Would our rugby players would play harder if fans threw two dollar bills on the field?

What are the major assets and liabilities of the Federal Reserve System? Describe each briefly.

Explain how the Fed sets the reserve ratio. Is the reserve ratio and the money supply positively or inversely related? Define: excess reserves and fully loaned institution.

What is the money multiplier and how is it related to the money supply and the monetary base?

Define open market operations. How does the Fed know how much money it needs to increase (decrease) the monetary base through open market operations?

If the Fed wants to increase the money supply, should it make an open market purchase or sale? Should it make more discount loans or fewer? If the Fed wants to decrease the money supply, what should it do?

If a bank has $10,000 in excess reserves, what is the most new lending that it should do? Why shouldn't it do more than that amount?

A student remarks, "If any one bank can safely loan only an amount equal to its excess reserves, I don't understand how the banking system as a whole can loan out an amount equal to several times the initial excess reserves in the system." Resolve this seeming paradox.

True, false, and explain: The dominant view today among economists is that the banks caused the Depression.

Define the Public Interest and Interest Group theories of government.

Why would the regulatory environment faced by banks in the decades following the Depression result in consumer protection regulations?

Define: the Consumer Credit Protection Act of 1968. Did this law deal with the asymmetric information problem in banking faced by consumers or by bankers?

What is redlining? How did the Community Reinvestment Act of 1977 address this problem? Did it eliminate it?

What are central banks and where do they come from?

What are the macroeconomic goals of the U.S. Federal Reserve? Explain in detail the purpose of Humphrey-Hawkins.

Why is price stability considered such an important goal relative to others? How successful has the Fed been in pursuing this goal?