The Central Bank closely monitors the money supply (i.e., the quantity of money in the economy). When trying to quantify the size of the money supply, the Central Bank must determine what should “count” as money. That is, it should choose whether to focus on the M1 or M2 definition of money. In this Short Writing Assignment, you will describe and calculate the values of these measures of the money supply.
Below, you are provided with values of several perfectly or near-perfectly liquid assets (before the transactions described below take place).
Savings Deposits $170 million
Money Market Mutual Funds $40 million
Travelers' Checks $5 million
Currency and Coins $25 million
Time Deposits $30 million
Checking Deposits $240 million
Suppose that households, on average, take $45 million out of their savings account balances and deposit those funds into their checking accounts. You will analyze the effect of these transactions on M1 and M2 in this assignment.
Make sure to address the following issues/questions in your response: 1) Describe which of the two definitions of money (M1 or M2) is a stricter definition of money and why; 2) Calculate the value of M1 before and after the transactions described above; 3) Calculate the value of M2 before and after the transactions described above; 4) Identify whether M1 has grown, shrunk, or neither; and 5) Identify whether M2 has grown, shrunk, or neither.
- OiyLv 68 months ago
There is a clear definition of M1 and M2. Nothing is going to lose.