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Chapter 14: Q2. (page 301)

Suppose that a small country currently has \(4 million of currency in circulation, \)6 million of checkable deposits, \(200 million of savings deposits, \)40 million of small-denominated time deposits, and \(30 million of money market mutual fund deposits. From these numbers we see that this small country鈥檚 M1 money supply is _______鈥�, while its M2 money supply is 鈥奯______.

a. \)10 million; \(280 million

b. \)10 million; \(270 million

c. \)210 million; \(280 million

d. \)250 million; $270 million

Short Answer

Expert verified

The correct answer is option a) $10 million; $280 million.

Step by step solution

01

Step 1. Explanation for the correct option

The M1 money supply consists of currency in circulation, checkable deposits, and traveler鈥檚 checks. The M1 money supply in the country is:

  • Currency in circulation is $4 million

  • Checkable deposits are $6 million

M1 = $4 million + $6 million =$10 million

The M2 money supply consists of M1 and savings deposits, small-term deposits, and shares in money market mutual funds. The M2 money supply of the country will be:

  • Savings deposits are $200 million

  • Time deposits are $40 million

  • Money market funds are $30 million

  • The M1 money supply is $ 10 million

The M2 money supply = $240 million + $40 million + $30million + $10 million

= $280 million

So the M1 money supply is $10 million, and the M2 money supply is $280 million.

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