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Chapter 14: Q2. (page 302)

Assume that Jimmy Cash has \(2,000 in his checking account at Folsom Bank and uses his checking account debit card to withdraw \)200 of cash from the bank’s ATM machine. By what dollar amount did the M1 money supply change as a result of this single, isolated transaction?

Short Answer

Expert verified

The M1 money supply will remain unchanged.

Step by step solution

01

Step 1. M1 component of the money supply

M1 is a component of the money supply that includes the currency in circulation, traveler’s checks, and checkable deposits. The currency in circulation includes notes and coins, and checkable deposits are deposits with the bank against which any size of check can be drawn.

02

Step 2. No change in the M1 money supply

When Jimmy withdraws $200 from the bank’s ATM, it increases the amount of the currency in circulation, but at the same time, decreases the total amount of checkable deposits. As a checkable deposit is a part of the M1 money supply, there will be a decrease of $200 in M1.

Therefore, there will be no change in the M1 money supply as the M1 money supply is still $200 because it initially decreases to $1800 when he withdrew money and then increases to $2000 when he uses the cash for the transaction.

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Most popular questions from this chapter

Suppose that a small country currently has \(4 million of currency in circulation, \)6 million of checkable deposits, \(200 million of savings deposits, \)40 million of small-denominated time deposits, and \(30 million of money market mutual fund deposits. From these numbers we see that this small country’s M1 money supply is _______ , while its M2 money supply is  _______.

a. \)10 million; \(280 million

b. \)10 million; \(270 million

c. \)210 million; \(280 million

d. \)250 million; $270 million

City Bank is considering making a $50 million loan to a company named SheetOil that wants to commercialize a process for turning used blankets, pillowcases, and sheets into oil. This company’s chances for success are dubious, but City Bank makes the loan anyway because it believes that the government will bail it out if SheetOil goes bankrupt and cannot repay the loan. City Bank’s decision to make the loan has been affected by:

a. liquidity.

b. moral hazard.

c. token money.

d. securitization

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Which two of the following financial institutions offer checkable deposits included within the M1 money supply: mutual fund companies; insurance companies; commercial banks; securities firms; thrift institutions? Which of the following items is not included in either M1 or M2: currency held by the public; checkable deposits; money market mutual fund balances; small-denominated (less than $100,000) time deposits; currency held by banks; savings deposits?

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b. It will rise by a quarter (25 percent).

c. It will fall by a quarter (−25 percent).

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