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Effects of newly printed currency

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Fed Chairman Ben Bernanke finally admitted that the Fed has been printing more new currency over the past few months to help stimulate the economy and more recently noted the economy may not yet be out of the woods, as some of us may already have concluded.. But, what about the money? I think we touched a bit on this subject in previous weeks but never came up with any concrete conclusions.

How much more money has the Fed printed and where is it now? Has it been stored in the Fed's vaults, given to member banks, or has it already been inserted into the economy; and if it has been inserted into the economy, how was it inserted and what affect is it having, if any? What affect will an increased M1 money supply have in the long-run?

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Solution Summary

The effects of the money recently created by the Federal Reserve are determined. The effects which will increase M1 money supply in the long-run are determined.

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The Federal Reserve does not print money directly, but is does authorize the Bureau of Engraving and Printing (BEP) to do so. Some of what is printed goes to replace worn currency, which the rest is injected inot the ecomony. In this way it affects M1, the sum of checking and physical currency in circulation. The Fed injects funds by buying bonds from from the government, which then spends the money in capital improvement projects, new hiring, and so forth. Thus the money results in additional income for government contractors and workers. Notes are essentially IOUs drawn on the Federal Reserve, which holds government bonds to offset the liabilities. In other words, the Fed can create money only as long as the government issues bonds it can buy.

The question doesn't refer to a specific year, but we ...

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