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Chapter 3: Q.16 (page 111)

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

Short Answer

Expert verified

When mutual fund share is purchase via check the M1 will decrease and M2 will increase.

Step by step solution

01

Step 1.  Introduction

In money market there are 4 measures of money supply in the economy they are M1, M2, M3, and M4. Where M1 and M2 are narrow money. Currency and money in checking accounts are included in M1 (demand deposits). M1 also includes traveler's checks, but they are becoming less popular. All of M1 is included in M2, as well as savings deposits, time deposits such as certificates of deposit, and money market funds.

02

Step 2. Explanation

In a situation when someone buys some money market mutual funds shares by writing a check in such a case M1 will decrease and M2 will increase as mutual fund share will directly effect the M2 supply of money. As a result initially M1 will increase by the return and affect M2 after purchasing mutual fund share by writing a check the M1 will decrease and M2 will increase.

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Most popular questions from this chapter

Why were people in the United States in the nineteenth century sometimes willing to be paid by check rather than with gold, even though they knew there was a possibility that the check might bounce?

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

Over several hundred years, payments systems used in countries across the world have evolved. For each of the following situations identify the type of payment utilized and at least one reason why economies are moving from checks to electronic payments.

a. Sheila visits a local grocery store to purchase a dozen eggs and a bag of dog food. She uses a 鈧�100 note to pay for the goods.

b. Rachael Garcia, a manager at Proxall Pharmacy, used a piece of gold worth $20 to pay for office supplies she needed this month.

c. Edward has just moved to the city to be closer to his office. He was shopping online for some pieces of furniture and he bought a wardrobe and a table lamp. He used a checking account to initiate an automatic bill payment for the items.

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

Was money a better store of value in the United States in the 1950s than in the 1970s? Why or why not? In which period would you have been more willing to hold money?
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