Quiz 14: Money, Banking, and Financial Institutions

Business

M1 measure the money supply that is circulated in the economy it also includes all currency which in physical form and deposits in checking accounts and withdrawal accounts. M2 is also a measure a money supply that contains all the element of M1 and near money like savings deposits, mutual funds, money market securities and other time deposits. a. M1 consists of currency in the hands of the public (Federal Reserve Notes $700 and coins $40) and all checkable deposits (all deposits in commercial banks and thrift or savings institutions on which checks of any size can be drawn) ($1,500); thus, M1 money supply totals $2,240. Currency held by commercial banks is excluded from M1 to avoid double counting. img b. M2 consists of savings deposits, including money market deposit accounts ($140); small-denominated time deposits funds from time deposits become available at their maturity ($100); money market mutual funds held by individuals ($400); thus, M2 money supply totals img

The basic functions of money are: it serves as a medium of exchange, unit of account, and store of value. Rapid inflation can undermine money's ability to perform the first function because as a medium of exchange, money allows easy transactions disallowing complications araised in barter system, but when there is rapid inflation, people have to carry huge amount of money for exchange of goods, which is not convenient. Rapid inflation can undermine money's ability to perform the second function because as a unit of account, money is used to measure the relative worth of goods. When there is a rapid inflation, money is not accurate measure and its measurement is changing rapidly with inflation. Rapid inflation can undermine money's ability to perform the third function because as store of value, money enables people to transfer purchasing power from the present to the future; when there is rapid inflation the purchasing power of money is decreasing.

M1 consists of currency in the hands of the public and all checkable deposits (all deposits in commercial banks and thrift or savings institutions on which checks of any size can be drawn). Currency held by commercial banks is excluded from M1 to avoid double counting. M1 will remain same in this case. Before this transaction, the $200 deposit was counted as checkable deposit; after the withdrawal, checkable deposit decreased by $200 and currency in the hands of the public increased by $200; thus M1 remains same.