I have a contradiction in my textbook. In one place it says that the definition
ID: 1248214 • Letter: I
Question
I have a contradiction in my textbook. In one place it says that the definition of the money supply is the cash held by the public + the amount of money held in their checking accounts ; any money held by the public in short-term deposits are NOT counted at all, even if the reserve rate on such deposits is only 25 %.
In another place in my textbook I read that money held in short-term deposits ARE counted if the bank has a reserve rate for those deposits of less than 100 % (i.e. as long as the bank can lend some of it out)
Which definition is correct?
Explanation / Answer
The answer to your question is that both are correct. As the original answer points out, there is more than one definition of the money supply. The narrowest definition is called M1, which corresponds roughly to your first definition, and a broader is M2 which corresponds roughly to your second.
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