Question

1. U.S. 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, however, continually improves and more and more counterfeits are circulated, what will happen to the following?
   • The value of money circulated.
   • The volume of cashless transactions.
   • The amount of money the U.S. Treasury spends to introduce additional security measures.
2. In November 2008, the Fed began to pay interest on reserves held at the bank.
   • What effect would you expect on excess reserves?
   • Did banks generally favor or oppose this action?
   • Would central banks generally favor or oppose this action?
   • What effect did this probably have on interest rates paid by banks?

Answer 1

Counterfeit currency refers to the duplication of currency or when a duplicate currency is produced without the legal sanction of the state or the local government.Counterfeit currency is a type of forgery.The studies shows that more than 75% that is nearly $600 billion in $100 bills gets circulated out of the United States.When the US dollar is taken in to consideration American $100 bill is one of the most counterfeited currencies due to its popularity but at the same time it is also one of the difficult currencies to imitate.When there are more counterfeited currencies circulated in US it will have a negative impact on the real money .It will lead to the reduction of value of real currencies .The counterfeit currencies will also lead to increases in the prices as there is an artificial increase in the supply of money which in turn will lead to an inflation in U.S economy.The volume of cashless transactions will increase as the amount of counterfeit or artificial currencies increases in the U.S economy.

From November 2008,Fed began to pay interest on reserves that are held at the bank .This helped Fed to increase the level of reserves and also kept the federal fund rates under control.Paying interest on the reserves will also help the Fed to widen its lending programmes.If Fed raises the reserve requirements the commercial banks will be left with limited amount of money to provide as loans and thus the interest rates will go up.