1. Identify whether the following items are counted in M1 only, M2 only, both M1
ID: 1108244 • Letter: 1
Question
1. Identify whether the following items are counted in M1 only, M2 only, both M1 and M2, or neither: A) A $1,000 balance in a checking account at a mutual savings bank B) A $100,000 (large) certificate of deposit issued by a New York bank. C) A $10,000 time deposit an elderly widow holds at her credit union D) A $50 traveler's check E) A $50,000 money market deposit account balance 2. Suppose Bob digs up a box in his front yard that contains $1000. A) Would anything happen to the money supply (M1)? Explain B) What would happen to the money supply when Bob deposits this in a bank (reserve-deposit ratio is.05)? What is the maximum amount of money that can be created? How does this occur? 3. A month later, Bob buys a $1000 government bond from the Fed with this money. A) What happens to the money supply (M1)? Does it increase or decrease? By how much? B) How would this impact Bob's future spending? Would it increase or decrease? C) Under what circumstances would Bob be likely to buy bonds ? (what are the differences in stocks and bonds?, why would one choose bonds over stocks?)Explanation / Answer
1. A) Both M1 and M2
Checking account is included under M1 money and all the items of M1 are also included in M2.
M1 Measurement:
M1 = C + DD + OD
Here, C refers to currency and includes coins and paper notes held by the public.
DD refers to demand deposits of the people with the commercial banks. These are cheqable deposits which can be withdrawn or transferred on demand
OD are other deposits which includes:
(i) Demand deposits with RBI of public financial institutions like IDBI.
(ii) Demand deposits with RBI of foreign central banks and of the foreign governments.
(iii) Demand deposits of international financial institutions like IMF and World bank.
M2 Measurement:
It is a broader concept of the supply of money compared to M1. Besides all the components of M1, it also includes savings of the people with the post offices. Thus,
M2 = M1 + Deposits with post office saving bank account
B) M2 only
C) M2 only
D) Both M1 and M2
E) M2 only
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.