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Chapter 3: Q.1 (page 110)

Why is simply counting currency an inadequate measure of money?

Short Answer

Expert verified

Counting currency is inadequate measure because, it does not cover entire money supply of the economy.

Step by step solution

01

Step 1. Introduction

Money is a tool that serves as a medium in making economic transactions. It facilitates trade, acts a store of unit, and a measure of value.

02

Step 2. Explanation

Money consists of checks, e-cash, deposits, and lots of different styles of fee that surpass the paper and coin form. Therefore, virtually counting foreign money is an insufficient degree as it simply constitutes a small part of money.

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Most popular questions from this chapter

Explain the concept of liquidity. Rank the following assets from most liquid to least liquid:

a. Land

b. The inventory of a merchandiser

c. Cash in hand

d. A savings account at a local bank

e. A one-year bond

f. Ordinary shares

If you use an online payment system such as PayPal to purchase goods or services on the Internet, does this affect the M1 money supply, the M2 money supply, both, or neither? Explain

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.

Was money a better store of value in the United States in the 1950s than in the 1970s? Why or why not? In which period would you have been more willing to hold money?

It is not unusual to find a business that displays a sign saying “no personal checks, please.” On the basis of this observation, comment on the relative degree of liquidity of a checking account versus currency
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