The FED Reserve Bank in Dallas manages the banknote supply/circulation in Texas which we can assume to be isolated from the other states. Suppose that the Dallas FED actually does not print money but cleans existing money. Cleaning of the money refers to heat treating it to get rid of dirt/wrinkles and pressing it afterward. This cleaning operation also extends the life of each banknote. Many detectors in ATMs and dispensing machines can read and hence accept only the clean money. After FED cleans the money, it is given to the commercial banks which put them into their ATMs. So the money circulation in Texas as defined above is a good example of a closed-loop supply chain. Suppose that the Dallas FED on average finishes the cleaning of $1.2 million every working day and gives this amount to the commercial banks in Texas. Furthermore, suppose that the average banknote remains in circulation for about 700 working days after each cleaning.

a) Estimate the amount of money in circulation in Texas. Explain which formula you use and what the variables in your formula are.

b) It is said above that each banknote remains in circulation about 700 working days between two cleaning operations. How does Dallas FED actually figure this out operationally? Without referring 16 to additional resources, guess/list what is the relevant data to arrive at the statistic of 700 days and how can this data be collected?

Answer rating: 100% (QA)

solution 1 Currency in circulation is all of the money that has been ... View the full answer