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Value of Money

US paper currency is made with several features that are difficult to counterfeit, including a security thread, color shifting ink, microprinting, a portrait, a watermark and a fine line printing pattern. As duplication technology continually improves and more and more counterfeits are circulated, what will happen to the following?

a) The value of money circulated
b) The volume of cashless transactions
c) The amount of money the Treasury spends to introduce additional security features.

The table below gives the Federal Funds rate target at the end of each year shown. Using these figures, describe how the monetary policy directions changed from 2001-2006. Year Federal Funds Target Rate
2001 1.75%
2002 1.25%
2003 1.00%
2004 1.75%
2005 4.25%
2006 5.25%

(Hint: to learn more, access the Federal Open Market Committee's decisions on the Federal Reserve's web site at www.federalreserve.gov.)

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(a) The value of money circulated will fall. This is because as the number of counterfeits increase, there will be more money in circulation thereby increasing its supply. This increase in supply will reduce the value of money. Further, because of increasing number of counterfeits, people would be more cautious about the notes that they hold. They would be reluctant to hold much dollars because they might think that whatever they are holding is a counterfeit (even though it is not). Thus, this will decrease the demand for ...

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