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Chapter 14: Q1. (page 302)

Assume that the following asset values (in millions of dollars) exist in Ironmania: Federal Reserve Notes in circulation = \(700; Money market mutual funds (MMMFs) held by individuals = \)400; Corporate bonds = \(300; Iron ore deposits = \)50; Currency in commercial banks = \(100; Savings deposits, including money market deposit accounts (MMDAs) = \)140; Checkable deposits = \(1,500; Small-denominated (less than \)100,000) time deposits = \(100; Coins in circulation = \)40.

a. What is M1 in Ironmania?

b. What is M2 in Ironmania?

Short Answer

Expert verified
  1. The M1 in Ironmania will be $700+$1+$500+$140= $2,240.
  2. The M2 in Ironmania will be $2,240+$400+$140+$100= $2,880.

Step by step solution

01

Step 1. M1 money in Ironmania

M1 is a component of the money supply that includes currency in circulation in the economy and the checkable deposits on which checks of any size can be drawn. Therefore, accordingly, the money in circulation is $700 of currency notes and $40 of coins, and the checkable deposits are $1,500, which means that the total M1 will be $2,240.

02

Step 2. M2 money in Ironmania

M2 is the component of the money supply that includes M1 money plus money market mutual funds (MMMFs) held by individuals; savings deposits, including money market deposit accounts (MMDAs); and small denominated (less than $100,000) time deposits. Therefore, given their values,

  • M1= $2,240,

  • money market mutual funds (MMMFs) held by individuals = $400,

  • savings deposits, including money market deposit accounts (MMDAs) = $140, and

  • Small denominated (less than $100,000) time deposits = $100.

When we add all these, we get M2.

M2 = $2240+$400+$140+$100 = $2880.

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