Which One Of Yhe Following Statements About The Money Supply Is Corect
Money and Banking
Measuring Money: Currency, M1, and M2
Learning Objectives
Past the end of this section, you will be able to:
- Contrast M1 money supply and M2 money supply
- Classify monies as M1 money supply or M2 coin supply
Cash in your pocket certainly serves as coin; however, what about checks or credit cards? Are they money, also? Rather than trying to state a single way of measuring coin, economists offer broader definitions of money based on liquidity. Liquidity refers to how quickly you can apply a fiscal asset to purchase a skilful or service. For example, cash is very liquid. You tin can utilise your $ten bill hands to buy a hamburger at lunchtime. However, $10 that you have in your savings account is non so easy to use. You lot must go to the depository financial institution or ATM machine and withdraw that greenbacks to buy your lunch. Thus, $10 in your savings account is
less liquid.
The Federal Reserve Banking concern, which is the central depository financial institution of the Usa, is a bank regulator and is responsible for monetary policy and defines coin according to its liquidity. There are two definitions of coin: M1 and M2 money supply. M1 money supply includes those monies that are very liquid such every bit cash, checkable (demand) deposits, and traveler's checks M2 coin supply is less liquid in nature and includes M1 plus savings and time deposits, certificates of deposits, and coin market funds.
M1 money supply includes coins and currency in apportionment—the coins and bills that circulate in an economy that the U.S. Treasury does not hold at the Federal Reserve Bank, or in bank vaults. Closely related to currency are checkable deposits, also known as need deposits. These are the amounts held in checking accounts. They are called demand deposits or checkable deposits because the cyberbanking institution must give the eolith holder his money "on need" when the client writes a check or uses a debit card. These items together—currency, and checking accounts in banks—contain the definition of coin known equally M1, which the Federal Reserve System measures daily.
A broader definition of money, M2 includes everything in M1 but also adds other types of deposits. For example, M2 includes savings deposits in banks, which are bank accounts on which you cannot write a check directly, but from which you can easily withdraw the coin at an automated teller motorcar or banking concern. Many banks and other financial institutions also offer a chance to invest in money marketplace funds, where they pool together the deposits of many private investors and invest them in a safety mode, such equally short-term government bonds. Another ingredient of M2 are the relatively modest (that is, less than nigh $100,000) certificates of eolith (CDs) or fourth dimension deposits, which are accounts that the depositor has committed to leaving in the banking concern for a certain period of fourth dimension, ranging from a few months to a few years, in exchange for a higher interest charge per unit. In short, all these types of M2 are money that you lot tin can withdraw and spend, simply which require a greater effort to practice so than the items in M1. (Figure) should help in visualizing the relationship between M1 and M2. Note that M1 is included in the M2 calculation.
The Relationship between M1 and M2 Money
M1 and M2 coin take several definitions, ranging from narrow to broad. M1 = coins and currency in circulation + checkable (need) deposit + traveler'south checks. M2 = M1 + savings deposits + coin market place funds + certificates of deposit + other fourth dimension deposits.
The Federal Reserve System is responsible for tracking the amounts of M1 and M2 and prepares a weekly release of information about the money supply. To provide an idea of what these amounts audio similar, according to the Federal Reserve Bank's mensurate of the U.Due south. money stock, at the end of February 2015, M1 in the The states was $three trillion, while M2 was $eleven.8 trillion. (Figure) provides a breakdown of the portion of each blazon of money that comprised M1 and M2 in February 2015, as provided by the Federal Reserve Bank.
| Components of M1 in the U.S. (February 2015, Seasonally Adapted) | $ billions |
| Currency | $1,271.eight |
| Traveler's checks | $2.nine |
| Demand deposits and other checking accounts | $ane,713.v |
| Full M1 | $2,988.two (or $three trillion) |
| Components of M2 in the U.Due south. (February 2015, Seasonally Adjusted) | $ billions |
| M1 money supply | $ii,988.two |
| Savings accounts | $7,712.1 |
| Time deposits | $509.2 |
| Individual money market place mutual fund balances | $610.viii |
| Full M2 | $11,820.3 (or $11.8 trillion) |
The lines separating M1 and M2 can become a little blurry. Sometimes businesses exercise not care for elements of M1 akin. For instance, some businesses will not accept personal checks for large amounts, but will accept traveler's checks or cash. Changes in banking practices and technology have fabricated the savings accounts in M2 more similar to the checking accounts in M1. For case, some savings accounts will allow depositors to write checks, use automated teller machines, and pay bills over the cyberspace, which has made it easier to access savings accounts. As with many other economic terms and statistics, the important point is to know the strengths and limitations of the various definitions of money, not to believe that such definitions are every bit articulate-cut to economists as, say, the definition of nitrogen is to chemists.
Where does "plastic money" like debit cards, credit cards, and smart money fit into this picture? A debit menu, like a check, is an instruction to the user's bank to transfer money direct and immediately from your bank business relationship to the seller. It is important to annotation that in our definition of money, information technology is checkable deposits that are money, not the paper check or the debit card. Although you lot tin make a purchase with a credit carte du jour, the financial institution does not consider it money simply rather a curt term loan from the credit carte company to you. When yous make a credit carte purchase, the credit card company immediately transfers money from its checking business relationship to the seller, and at the end of the month, the credit card company sends you a bill for what you have charged that month. Until you pay the credit card pecker, yous have effectively borrowed money from the credit card company. With a smart card, you lot can store a sure value of money on the card and then use the card to make purchases. Some "smart cards" used for specific purposes, like long-distance telephone calls or making purchases at a campus bookstore and deli, are non actually all that smart, because you can only use them for certain purchases or in certain places.
In short, credit cards, debit cards, and smart cards are dissimilar ways to movement money when you make a purchase. Nonetheless, having more credit cards or debit cards does not modify the quantity of coin in the economy, whatsoever more than than printing more than checks increases the amount of money in your checking business relationship.
I central message underlying this discussion of M1 and M2 is that coin in a modern economic system is not just paper bills and coins. Instead, money is closely linked to banking company accounts. The cyberbanking system largely conducts macroeconomic policies apropos money. The next section explains how banks function and how a nation'south cyberbanking system has the ability to create money.
Read a brief article on the current monetary challenges in Sweden.
Key Concepts and Summary
We mensurate money with several definitions: M1 includes currency and money in checking accounts (demand deposits). Traveler'due south checks are as well a component of M1, just are declining in use. M2 includes all of M1, plus savings deposits, time deposits like certificates of deposit, and money market funds.
Self-Cheque Questions
If yous are out shopping for clothes and books, what is easiest and most user-friendly for yous to spend: M1 or M2? Explain your reply.
The currency and checks in M1 are easiest to spend. It is harder to spend M2 directly, although if at that place is an automatic teller auto in the shopping mall, you tin plow M2 from your savings account into an M1 of currency quite quickly. If your answer is nigh "credit cards," then you are actually talking about spending M1—although information technology is M1 from the business relationship of the credit carte du jour company, which yous will repay afterwards when you credit menu bill comes due.
For the following list of items, indicate if they are in M1, M2, or neither:
- Your $5,000 line of credit on your Bank of America card
- $50 dollars' worth of traveler'due south checks you have not used even so
- $i in quarters in your pocket
- $1200 in your checking business relationship
- $2000 you have in a money market account
- Neither in M1 or M2
- That is part of M1, and because M2 includes M1 it is as well role of M2
- Currency out in the public easily is part of M1 and M2
- Checking deposits are in M1 and M2
- Money market accounts are in M2
Review Questions
What components of money do we count as part of M1?
What components of money practise we count in M2?
Critical Thinking Questions
Explain why you think the Federal Reserve Bank tracks M1 and M2.
The full amount of U.S. currency in circulation divided by the U.S. population comes out to about $3,500 per person. That is more than near of the states carry. Where is all the cash?
If you take $100 out of your piggy bank and deposit it in your checking business relationship, how did M1 modify? Did M2 change?
References
Federal Reserve Statistical Release. November 23, 2013. http://www.federalreserve.gov/RELEASES/h6/electric current/default.htm#t2tg1link.
Glossary
- coins and currency in circulation
- the coins and bills that circulate in an economy that are non held by the U.S Treasury, at the Federal Reserve Bank, or in depository financial institution vaults
- credit card
- immediately transfers money from the credit card company's checking account to the seller, and at the end of the calendar month the user owes the money to the credit card company; a credit menu is a brusque-term loan
- debit carte du jour
- like a check, is an pedagogy to the user'due south banking company to transfer money directly and immediately from your banking company business relationship to the seller
- demand deposit
- checkable deposit in banks that is available past making a cash withdrawal or writing a check
- M1 coin supply
- a narrow definition of the money supply that includes currency and checking accounts in banks, and to a lesser degree, traveler's checks.
- M2 money supply
- a definition of the money supply that includes everything in M1, but also adds savings deposits, money market place funds, and certificates of deposit
- money market fund
- the deposits of many investors are pooled together and invested in a safe way like brusk-term government bonds
- savings deposit
- bank account where you cannot withdraw money past writing a check, but tin withdraw the money at a bank—or tin can transfer it hands to a checking account
- smart bill of fare
- stores a certain value of coin on a carte du jour and then one can employ the bill of fare to brand purchases
- fourth dimension deposit
- account that the depositor has committed to leaving in the bank for a certain flow of time, in commutation for a higher charge per unit of involvement; also chosen certificate of eolith
Source: https://opentextbc.ca/principlesofeconomics2eopenstax/chapter/measuring-money-currency-m1-and-m2/
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