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Chapter 3: Q. 15 (page 111)

For each of the following assets, indicate which of the monetary aggregates (M1 and M2) includes them:

a. Currency b. Money market mutual funds c. Small-denomination time deposits d. Checkable deposits

Short Answer

Expert verified

(1) Currency = M1 and M2

(2) Money market mutual funds = M2 Only

(3) Small-denomination time deposit = M2 only

(4) checkable deposit = M1 and M2

Step by step solution

01

Monetary aggregates 

A monetary aggregate, such as money or money market funds, is a formal manner of accounting for money. The supply of money in a country is measured using monetary aggregates.

02

Step 2:Explanantion

(1) Currency is a component of M1, and because M2 contains all M1, it is included in both.

(2) Only M2 includes money market mutual funds.

(3) M2 includes time deposits with tiny denominations.

(4) Checkable deposits are part of M1, and since all of M1 is included in M2, they are both included.

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Most popular questions from this chapter

Over several hundred years, payments systems used in countries across the world have evolved. For each of the following situations identify the type of payment utilized and at least one reason why economies are moving from checks to electronic payments.

a. Sheila visits a local grocery store to purchase a dozen eggs and a bag of dog food. She uses a €100 note to pay for the goods.

b. Rachael Garcia, a manager at Proxall Pharmacy, used a piece of gold worth $20 to pay for office supplies she needed this month.

c. Edward has just moved to the city to be closer to his office. He was shopping online for some pieces of furniture and he bought a wardrobe and a table lamp. He used a checking account to initiate an automatic bill payment for the items.

The money supply is the entire amount of money in circulation, including cash, coins, and bank account balances. The money supply is typically defined as a collection of safe assets that consumers and companies can use to make payments or invest in short-term.

Which of the Federal Reserve’s measures of the monetary aggregates—M1 or M2—is composed of the most liquid assets? Which is the larger measure?

Go to the St. Louis Federal Reserve FRED database, and find data on small-denomination time deposits (STDSL), savings deposits and money market deposit accounts (SAVINGSL), and retail money market funds (RMFSL). Calculate the percentage change of each of these three components of M2 (not included in M1) from the most recent month of data available to the same time one year prior. Which component has the highest growth rate? The lowest growth rate? Repeat the calculations using the data from January 2000 to the most recent month of data available, and compare your results. Use your answers from question 1 to determine which grew faster: the non-M1 components of M2, or the M1 money supply.

Why have some economists described money during a hyperinflation as a “hot potato” that is quickly passed from one person to another?
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