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Chapter 3: Q.1 (page 110)

Why is simply counting currency an inadequate measure of money?

Short Answer

Expert verified

Counting currency is inadequate measure because, it does not cover entire money supply of the economy.

Step by step solution

01

Step 1. Introduction

Money is a tool that serves as a medium in making economic transactions. It facilitates trade, acts a store of unit, and a measure of value.

02

Step 2. Explanation

Money consists of checks, e-cash, deposits, and lots of different styles of fee that surpass the paper and coin form. Therefore, virtually counting foreign money is an insufficient degree as it simply constitutes a small part of money.

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Most popular questions from this chapter

If you use an online payment system such as PayPal to purchase goods or services on the Internet, does this affect the M1 money supply, the M2 money supply, both, or neither? Explain

For each of the following assets, indicate which of the monetary aggregates (M1 and M2) includes them:

a. Currency b. Money market mutual funds c. Small-denomination time deposits d. Checkable deposits

19. The table below shows hypothetical values, in billions of dollars, of different forms of money.

a. Use the table to calculate the M1 and M2 money supplies for each year, as well as the growth rates of the M1 and M2 money supplies from the previous year.

b. Why are the growth rates of M1 and M2 so different? Explain.


2019202020212022
Currency880895900906
Money market mutual fund shares680685683692
Saving account deposits5,5005,7805,9686,105
Money market deposit accounts1,2141,2451,2741,329
Demand and checkable deposits1,000972980993
Small denomination time deposits8408711,1331,576
Traveler's check5543
3-month treasury bills1,9862,3742,4362,502

Assume that you are interested in earning some return on the idle balances you usually keep in your checking account and decide to buy some money market mutual funds shares by writing a check. Comment on the effect of your action (with everything else the same) on M1 and M2

Why have some economists described money during a hyperinflation as a 鈥渉ot potato鈥� that is quickly passed from one person to another?
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