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Chapter 27: Problem 3

If you are out shopping for clothes and books, what is easiest and most convenient for you to spend: M1 or M2? Explain your answer.

Short Answer

Expert verified
In the context of shopping for clothes and books, M1 is the easiest and most convenient form of money to spend. This is because M1 includes physical currency, checking accounts, and other liquid assets that can be directly used for transactions, while M2 contains less liquid forms of money that need to be converted before being spent.

Step by step solution

01

Introduction to M1 and M2

M1 money supply includes the physical currency (coins and bills) and demand deposits (checking accounts), which are the most liquid form of money people use daily. Traveler's checks also fall into this category, but they are not commonly used today. M2 money supply includes M1 plus some additional financial assets like savings accounts, small time deposits, and money market funds. These are less liquid than M1, which means they are not immediately available for direct transactions but can be easily converted to cash when needed.
02

Comparing M1 to M2 for Shopping

When shopping for clothes and books, you would typically use physical cash (bills and coins), debit cards, or credit cards that are linked to your checking account. These forms of payment fall under the M1 money supply category. If you were to use money from your savings account or a money market fund, you would need to transfer those funds to your checking account or withdraw the cash before using it for shopping. This process makes M2 less convenient when it comes to spending.
03

Conclusion

In the context of shopping for clothes and books, M1 is the easiest and most convenient form of money to spend. This is because M1 includes physical currency, checking accounts, and other liquid assets that can be directly used for transactions, while M2 contains less liquid forms of money that need to be converted before being spent.

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Most popular questions from this chapter

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