The table on the right contains an approximate breakdown of the U.S. money suppl

Question

The table on the right contains an approximate breakdown of the U.S. money supply in September 2001 U.S. Money Supply (in billions of dollars) currency held outside banks savings accounts other near monies traveler's checks/ other checkable deposits money market accounts demand deposits $440 $2,100 $1000 S60 M2 Use this data to calculate M1 and M1 was $1200 billion. (Enter your response as an integer.) M2 was billion. (Enter your response as an integer.) $1,100 $700 The main advantage of looking at M2 instead of M1 is that M2 is generally more stable. To illustrate, suppose banks raised the interest rate paid on checking accounts, while the rate paid on savings accounts remained unchanged, resulting in consumers transferring $150 billion from savings into their checking accounts How would the money supply be affected? 0 A. MI would increase by $75.0 billion, and M2 would decrease by $75.0 billion O B. MI would increase by $150 billion, but M2 would remain unchanged ° C. Both M1 and M2 would be unaffected

Explanation / Answer

Ans:

M1 includes physical money both paper and coin as well as , demand deposits, checking deposits and negotiable order of withdrawal (NOW) .

M1 = $440 + $60 + $700

= $1100 billions

M2 = M1 and savings deposits, money market securities, mutual funds and other near monies.

   = $1100 + $2100 + $1000

   = $4200 billions

1) M1 = $1200 billion

2) M2 = $4200 billion

3) Option B

M1 would increase by $150 billion,But M2 would remain unchanged.

Since money is transfered from saving(M2) to checking deposits(M1), M1 increases.

Since M1 is part if M2, M2 would remain unchanged.

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