A computer-based teaching aid for some core aspects of money in the economy.

Abstract

This dissertation develops an electronic model covering some core aspects of money and banking. It examines fractional reserve banking from the perspective of the U.S. Central Bank. Short-run effects of money supply changes are examined. The model gauges the impact of money supply changes on inflation, using the equation of exchange. A portfolio balance approach is used to model the impact of money supply changes on interest rates. The model distinguishes between long-run and short-run interest rates based on the expectations theory of the term structure of interest rates. Interest rate changes affect the exchange rate via uncovered interest rate parity. The impact of money on the real economy is modeled through changes in inflation, interest rates, and exchange rates. The model is developed in Microsoft's Excel product. The spreadsheet is designed to allow the user to step through the money creation process at a controlled pace. Different scenarios are examined, demonstrating both functionality and application within the classroom.