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Chapter 3: Q.13 (page 111)

Which of the Federal Reserve鈥檚 measures of the monetary aggregates鈥擬1 or M2鈥攊s composed of the most liquid assets? Which is the larger measure?

Short Answer

Expert verified

M1 is the most liquid and M2 is the larger measure of money supply.

Step by step solution

01

Step 1. Introduction

The money supply is the entire amount of money in circulation, including cash, coins, and bank account balances. The money supply is typically characterized as a collection of safe assets that people and companies can use to make payments or invest in the short term.

02

Step 2. Explanation

Cash is commonly regarded as the most liquid asset. A bank transfer or an ATM withdrawal can swiftly and simply access cash in a bank or credit union account. M1 is the most the liquid asset and M2 is the larger measure of money supply because it comprises highly liquid assets that aren't cash.

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Most popular questions from this chapter

In April 2009, year-over-year the growth rate of M1 fell to 6.1%, while the growth rate of M2 rose to 10.3%. In September 2013, the growth rate of the M1 money supply was 6.5%, while the growth rate of the M2 money supply was about 8.3%. How should Federal Reserve policymakers interpret these changes in the growth rates of M1 and M2?

It is not unusual to find a business that displays a sign saying 鈥渘o personal checks, please.鈥� On the basis of this observation, comment on the relative degree of liquidity of a checking account versus currency

Explain the concept of liquidity. Rank the following assets from most liquid to least liquid:

a. Land

b. The inventory of a merchandiser

c. Cash in hand

d. A savings account at a local bank

e. A one-year bond

f. Ordinary shares

Three goods are produced in an economy by three individuals: Good Producer Apples Orchard owner Bananas Banana grower Chocolate Chocolatier If the orchard owner likes only bananas, the banana grower likes only chocolate, and the chocolatier likes only apples, will any trade between these three persons take place in a barter economy? How will introducing money into the economy benefit these three producers?

Go to the St. Louis Federal Reserve FRED database, and find data on small-denomination time deposits (STDSL), savings deposits and money market deposit accounts (SAVINGSL), and retail money market funds (RMFSL). Calculate the percentage change of each of these three components of M2 (not included in M1) from the most recent month of data available to the same time one year prior. Which component has the highest growth rate? The lowest growth rate? Repeat the calculations using the data from January 2000 to the most recent month of data available, and compare your results. Use your answers from question 1 to determine which grew faster: the non-M1 components of M2, or the M1 money supply.
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