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Chapter 3: Q.11 (page 111)

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

Short Answer

Expert verified

The M1 and M2 money supplies would theoretically remain unchanged, but money would be transferred from your checking account to a third party once the credit transaction was completed.

Step by step solution

01

Step 1. Introduction

Money is a tool that acts as a medium of exchange in economic transactions. It facilitates trade and acts as store of value. There are different measures of money supply which calculate the availability of money in the market.

02

Step 2. Explanation 

M1 and M2 are both unaffected: Although PayPal and many other e-money systems function similarly to conventional forms of money in terms of facilitating purchases of goods and services, they are not included in M1 or M2. Due to the credit-based nature of PayPal and similar payment systems, future payments for funds used today must be made with money already in the system, such as currency or funds in a bank deposit account.

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Most popular questions from this chapter

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.

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

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.

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
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