Introduction to Finance

1.
Deposits in Bank A are reduced by $100 ($20 in required reserves and $80 in excess reserves).
2.
Bank A’s deposit at its Reserve Bank is reduced by $100.
3.
The amount of Federal Reserve notes in circulation is increased by $100.
Changes in the components of the money supply traditionally have occurred during hol-
iday periods, with the most pronounced change taking place during the year-end holiday sea-
son. These changes are beyond the immediate control of the Fed, which must anticipate and 
respond to them to carry out possible money supply growth targets. Generally, there has been 
an increase in currency outstanding between November and December and a subsequent par-
tial reversal during January. An increase in circulating currency prior to the Christmas holi-
days requires adjustment by the Fed to control the money supply. As large amounts of cash are 
withdrawn from depository institutions, deposit contraction might occur unless the Fed moves 
to off set it by purchasing government or other securities in the open market.
Also there traditionally has been an increase in demand deposits between November and 
December and a subsequent decline in demand deposits during the early part of the next year. 
This also seems to refl ect the public’s surge in spending during the Christmas holiday season 
and the payment for many of the purchases early in the next year by writing checks on demand 
deposit accounts. The Fed, in its eff ort to control bank reserves and the money supply, also 
must take corrective actions to temper the impact of these seasonal swings in currency and 
checking account balances. Of course, the increasing use of credit cards and debit cards con-
tinues to alter the use of currency and the writing of checks.
Federal Reserve System Transactions
Transactions between banks and the Fed and changes in reserve requirements by the Fed also 
aff ect either the level of total reserves or the degree to which deposits can be expanded with