The table below shows hypothetical values, in billions of dollars, of different
ID: 1149688 • Letter: T
Question
The table below shows hypothetical values, in billions of dollars, of different forms of money 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 a. year. b. Why are the growth rates of M1 and M2 so different? Explain. A. Currency B. Money market mutual fund shares C Saving account deposits D. Money market deposit accounts E. Demand and checkable deposits 2015 900 680 5,500 1,214 1,000 830 4 1,986 2016 920 681 5,780 1,245 972 861 4 2,374 2017 925 679 5,968 1,274 980 1,123 2018 931 688 6,105 1,329 993 1,566 2 2,502 Small denomination time deposits G. Traveler's checks H.3-month treasury bills 2,436Explanation / Answer
M1 money supply includes those monies that carry high degree of liquidity.
M1= Currency/cash+Checkable and demand deposit+traveler's checks
(A) (E) (G)
M1(2016) = 900+1000+4 = $1904 billion
M1(2017) = 920+972+4 = $1896 billion
simillarly,
M1(2017) = $1908 billion
M1(2018) = $1926 billion
M2 money supply is relatively less liquid in nature as compared to M1.
M2 = M1+money market mutual fund shares+ savings acount deposit+money market deposit accounts+small denomination time deposits
(B) (C) (D) (F)
M2(2015) = 680+5500+1214+830 = $8224 billion
similarly,
M2(2016) = $8567 billion
M2(2017) = $9044 billion
M2(2018) = $9688 billion
GROWTH RATE OF M1 FOR 2015-16= [M1(2016) – M1(2015)] / M1(2015)
GROWTH RATE OF M2 FOR 2015-16= [M2(2016) – M2(2015)] / M2(2015)
We can clearly see that M2 grows more rapidly and is more stable as compared to M1. The reason being that the economy is in boom period which makes people put less of their money in highly liquid assets rather, makes them invests in short term time deposits, mutual funds, etc.
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