Problem 3 Briefly explain whether each of ... [FREE SOLUTION]

Chapter 25: Problem 3

Briefly explain whether each of the following is counted in M1. a. The coins in your pocket b. The funds in your checking account c. The funds in your savings account d. The traveler's checks that you have left over from a trip e. Your Citibank Platinum MasterCard

Short Answer

Expert verified

a. Yes, it is part of M1. b. Yes, it is part of M1. c. No, it's not part of M1. d. Yes, it is part of M1. e. No, it's not part of M1.

Step by step solution

Analyzing the Coins in Your Pocket

The coins in your pocket are physical money. As such, they are part of M1.

Analyzing the Funds in Your Checking Account

The funds in checking accounts are part of M1. They are liquid assets and can be used directly to purchase goods and services.

Analyzing the Funds in Your Savings Account

The funds in the savings account do not fall under M1. Even though these are liquid, they are not directly used for transactions, hence, not part of M1.

Analyzing the Traveler's Checks

Traveler's checks are part of M1 because they are easily convertible into cash and used for payments directly.

Analyzing Your Citibank Platinum MasterCard

The Citibank Platinum MasterCard itself is not included in M1, as it represents an ability to borrow, not a store of money.

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

M1 components

The money supply in an economy is defined through various categories, one of which is known as M1. M1 components are the most liquid forms of money. This means they can be easily and quickly used to purchase goods and services. M1 specifically includes physical currency such as coins and paper notes, demand deposits, and other liquid deposits that are easily accessible.
Some of the key components of M1 include:

Currency in circulation: This includes the coins and paper money that people have in their pockets and wallets.
Checking account deposits: These are funds that individuals keep in their checking accounts, which can be accessed on-demand through checks or debit cards to make payments.
Traveler's checks: These are prepaid checks used as a secure way to travel with money, representing a form of liquid currency specified under M1.

M1 does not include items such as credit balances on credit cards, as these represent loans rather than actual money supplies.

liquid assets

Liquid assets are a crucial component of the money supply because they determine how easily an asset can be converted into cash without losing value. Liquid assets are important because they provide the liquidity necessary to cover short-term obligations and expenses.
Here are some characteristics of liquid assets:

Highly accessible: Liquid assets can be quickly and easily accessed and used for transactions without any significant delay.
Stable in value: They hold consistent value and don't diminish when converted into other forms of currency or used in transactions.
Include money market instruments, savings accounts, and certain bonds, though not all are part of M1.

In terms of M1, cash, demand deposits, and other forms of quickly accessible funds are considered liquid assets.

checking account funds

Checking account funds are one of the main components of M1 money supply. These are funds that are deposited in a bank account from which withdrawals can be made using checks or debit cards. Checking accounts are designed for daily transactions and offer high liquidity to account holders.
Key features of checking account funds include:

Transactional utility: They are used primarily for the purpose of day-to-day transactions and dealings.
High liquidity: Easily accessible and quickly usable for payment without any hindrance.
No or low restrictions: Unlike savings accounts, there are generally no restrictions on the number of times you can access your funds.

By being a part of M1, checking account funds play an essential role in facilitating the smooth flow of money in the economy.

savings account funds

Savings account funds are slightly different from checking accounts in terms of liquidity and their categorization in the money supply. Although savings accounts are also highly liquid, they are not typically included in M1.
Here are some reasons why:

Lower daily usage: They are not used directly for daily transactions, unlike checking accounts.
Withdrawal limits: Often have restrictions on the number of withdrawals that can be made in a month.
Purpose: They are designed primarily for long-term saving, rather than immediate spending.

While not part of M1, savings accounts contribute to wider categories like M2 and M3, as they represent a significant portion of less liquid assets.

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