(1) In the 1990s Automatic Teller Machines (ATMs) were invented. This financial

Question

(1) In the 1990s Automatic Teller Machines (ATMs) were invented. This financial innovation allowed people to withdraw funds from their bank deposits at any time of the day beyond normal banking hours, and from machines that aren’t located on the bank property. It led to people transferring significant amounts of funds from their (Retail) Money Market Mutual Funds into checkable deposits such as Demand Deposits and NOW Accounts.

(d) Many economists are not satisfied with M2, because it includes small time deposits. Provide a definition for an alternative money measure to M2 which does not contain this asset. What fundamental role for money (e.g. medium of exchange, standard of value, etc.) does this argument pertain to? (2 points)

(e) Money Market Deposit Accounts (MMDAs) were allowed in the mid-1980s to help banks counter disintermediation due customers turning to Retail Money Market Mutual Funds (MMMFs). Defining disintermediation and Retail MMMFs, briefly explain how the invention of MMDAs in the early 1980s tried to address this problem. (3 points)

Explanation / Answer

Question (d) Definition for an alternative money measure to M2:-

M2 includes the following:-

i) Currency (including coins and paper notes) held by public.

ii) Demand Deposits of the people with commercial banks.

iii) Other deposits with Reserve Bank which includes demand deposits of Public Financial Institutions, Foreign Central Bank and of the foreign government etc.

iv) Saving Deposits with Post Offices.

The Fundamental Role of Money:-

1) Money acts as medium of exchange:- Money serves as medium of exchange. Money helps in buying and selling of goods. Goods are exchanged for money and this money can be used for buying any other good that we need. Money facilitates trade in the country.

2) Money acts as a store of value:- Money serve as good store of value. It is more convenient to store value or wealth in terms of money because (a) storage of value does not need much space and (b) Value of money remains relatively stable compared to other commodities.

3) Money as a Unit of Value:- Money serves as a unit of value in terms of which the value of all goods and services are measured.

Question (e)

Retail Money Market Mutual Funds:-

Money market mutual funds were introduced in the economy with the objective of enabling to gain from money market instruments since it is practically impossible for individuals to invest in instruments like Commercial Papers, Certificate of deposits and Treasury Bills as they require huge investments. These mutual funds are primarily intended for individual investors including non-residents who may invest on a non-repatriable basis.

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