Exploring Check Clearing

 3. Jane Doe writes a check for $50 to Richard's Pharmacy. Jane banks at Jane's Bank, and Richard's Pharmacy at the New Bank. Richard's Pharmacy deposits the check in its checking account, and the check clears through the system. Show the changes that this transaction will cause on the balance sheets below.

Jane's Bank
Assets		Liabilities and Net Worth
Vault Cash $	.	Checking Accounts $
Deposits at the Fed. Res $		Savings Accounts $
Loans $		Other Liabilities $
Securities $		Net Worth $
Other $
******
New Bank
Assets		Liabilities and Net Worth
Vault Cash $	.	Checking Accounts $
Deposits at the Fed. Res $		Savings Accounts $
Loans $		Other Liabilities $
Securities $		Net Worth $
Other $
b) What, if anything, will happen to the amount of money? ?? Increase Decrease Stay the Same
c) What, if anything, will happen to the amount of legal reserves? ?? Increase Decrease Stay the Same
Remember that balance sheets must balance. Also remember that we are looking not at Jane's balance sheet, but the balance sheet of her bank.

4. Show what changes will happen in the balance sheets as a result of each of these transactions. In all cases you must clearly label the changes, that is, a number is not enough.

a. Sue withdraws $100 from her checking account

Sue		. . . . . .	Sue's Bank
____Assets____	_Liabilities & NW_	*	____Assets____	_Liabilities & NW_
.	.	*	.	.
.	.	*	.	.

b. Joe borrows $400 from his bank. The bank gives him the loan by increasing his checking account.

Joe		. . . . . .	Joe's Bank
____Assets____	_Liabilities & NW_	*	____Assets____	_Liabilities & NW_
.	.	*	.	.
.	.	*	.	.

c. Jesse & James rob the bank, which is not insured against this event. They take $10,000 in cash and make a clean getaway.

Jesse & James		. . . . . .	Victim Bank
____Assets____	_Liabilities & NW_	*	____Assets____	_Liabilities & NW_
		*
		*

d. The First Bank buys $100,000 worth of t-bills from Dave, one of its depositors.

Dave		. . . . . .	First Bank
____Assets____	_Liabilities & NW_	*	____Assets____	_Liabilities & NW_
		*
		*

e. The Federal Reserve buys $100,000 worth of t-bills from First Bank, which has deposits at the Fed.

First Bank		. . . . . .	Federal Reserve
____Assets____	_Liabilities & NW_	*	____Assets____	_Liabilities & NW_
		*
		*

5. For an economist interested in monetary theory, PayPal.com is one of the more interesting sites on the web. It allows individuals to pay others over the Internet using a credit card. Here was their pitch when they started:

"PayPal.com is a completely free service that lets users Pay Money to anyone with an email address. Use PayPal.com to settle restaurant tabs with colleagues, pay friends for movie tickets, or buy a baseball card at an online auction - all with the click of a mouse! PayPal charges the money to an existing credit card or bank account. It's faster, safer and easier than mailing a personal check.

"Signing up is quick, easy and you can download the money to your bank account at any time. No strings attached."

Visit PayPal.com at http://www.paypal.com/ to see what they are doing. Then answer the questions below.

a. Suppose I have PayPal charge my credit card $500 and transfer those funds to you. You let the funds sit in your PayPal account and I pay my credit card bill. What has happened to your balance sheet, my balance sheet, and PayPal's balance sheet? Does this transaction change the amount of bank deposits? Does it change bank reserves? Does it change the amount of money in the economy?
b. PayPal accounts are new, and they are not counted as part of the money stock. Should they be counted as money? Why or why not?
c. When PayPal started, they gave anyone who signed up $10.00 in their new account. Where did that $10.00 come from? Can you show on balance sheets what happened?
d. Paypal charges transactions fees, much as credit card companies do. Can Paypal also earn income if people maintain large Paypal balances? Explain.

(Comment: Paypal is a good illustration of network economies, discussed here.)

---

---