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Chapter 3: Q.13 (page 111)

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?

Short Answer

Expert verified

M1 is the most liquid and M2 is the larger measure of money supply.

Step by step solution

01

Step 1. Introduction

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

02

Step 2. Explanation

Cash is commonly regarded as the most liquid asset. A bank transfer or an ATM withdrawal can swiftly and simply access cash in a bank or credit union account. M1 is the most the liquid asset and M2 is the larger measure of money supply because it comprises highly liquid assets that aren't cash.

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Most popular questions from this chapter

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

Go to the St. Louis Federal Reserve FRED database, and find data on currency (CURRSL), traveler’s checks (TVCKSSL), demand deposits (DEMDEPSL), and other checkable deposits (OCDSL). Calculate the M1 money supply, and calculate the percentage change in M1 and in each of the four components of 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.

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

Three goods are produced in an economy by three individuals: Good Producer Apples Orchard owner Bananas Banana grower Chocolate Chocolatier If the orchard owner likes only bananas, the banana grower likes only chocolate, and the chocolatier likes only apples, will any trade between these three persons take place in a barter economy? How will introducing money into the economy benefit these three producers?

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.
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