Monetary Aggregates in the US - M1 and M2
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Monetary Aggregates in the US - M1 and M2

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Questions and Answers

In high-inflation countries, what often becomes the unit of account despite the existence of local currency?

  • The local currency
  • Foreign currencies
  • Dollars (correct)
  • Gold

    • What was the average amount of currency held per person in the U.S. according to a 1995 survey?

  • $500
  • $100 (correct)
  • $50
  • $1,375

    • Which of the following statements is true regarding the circulation of U.S. currency?

  • Some U.S. currency is held abroad. (correct)
  • Most U.S. currency is hoarded by households.
  • All U.S. currency is held within the United States.
  • U.S. currency circulates less than local currency in high-inflation countries.

    • What is a significant reason some currency is held outside of the United States?

    <p>To support illegal activities</p> Signup and view all the answers

    What percentage of U.S. currency is estimated to be held outside the United States?

    <p>About 50%</p> Signup and view all the answers

    What was the estimated annual flow of U.S. currency abroad in 1995?

    <p>$8 billion</p> Signup and view all the answers

    What does the survey indicate about household admission of currency holdings?

    <p>Households do not admit to holding most of the currency outstanding.</p> Signup and view all the answers

    What is generally regarded as the classic statement of the functions of money?

    <p>Money and the Mechanism of Exchange</p> Signup and view all the answers

    What financial innovation did thrifts create to circumvent the prohibition on checkable accounts?

    <p>Negotiable order of withdrawal (NOW) accounts</p> Signup and view all the answers

    What is a characteristic of negotiable CDs?

    <p>They are liabilities of banks that can be traded in the open market.</p> Signup and view all the answers

    What happened to money market deposit accounts (MMDA) after banks were allowed to issue them in 1982?

    <p>Deposits surged from zero to $320 billion in just a few months.</p> Signup and view all the answers

    Which of the following is a common debate regarding the definition of the money supply?

    <p>If credit cards should be considered a means of payment.</p> Signup and view all the answers

    What is the primary change to the monetary aggregates expected over time?

    <p>The definitions of the monetary aggregates will likely evolve.</p> Signup and view all the answers

    What was a notable change regarding the assets defining money supply prior to 1982?

    <p>Money market deposit accounts were not allowed to be issued.</p> Signup and view all the answers

    Which of the following represents a potential issue in defining the components of money supply?

    <p>The practicality of using certain denominations for everyday transactions.</p> Signup and view all the answers

    What significant characteristic defines money as a remarkable device?

    <p>It is universally accepted for transactions.</p> Signup and view all the answers

    Which of the following components is NOT included in M1?

    <p>Savings deposits</p> Signup and view all the answers

    What is the definition of demand deposits as stated in the monetary aggregates?

    <p>Non-interest-bearing checking accounts excluding certain government deposits</p> Signup and view all the answers

    Which of the following is considered part of M2?

    <p>Savings deposits</p> Signup and view all the answers

    How does M2 define small time deposits?

    <p>Interest-bearing deposits with a maturity date less than $100,000</p> Signup and view all the answers

    Which of the following is true about money market mutual fund (MMMF) shares?

    <p>They represent interest-earning checkable deposits in mutual funds</p> Signup and view all the answers

    What distinguishes a money market deposit account (MMDA) from regular MMMFs?

    <p>MMDA accounts are insured up to $100,000</p> Signup and view all the answers

    What component is counted in M2 but not in M1?

    <p>Small time deposits</p> Signup and view all the answers

    How are traveler’s checks categorized based on the provided definitions?

    <p>Checks issued by nonbanks are part of M1</p> Signup and view all the answers

    What primarily influences the demand for real balances?

    <p>The yield on alternative assets</p> Signup and view all the answers

    In high inflation scenarios, households may prefer to hold wealth in what form?

    <p>Real assets such as food or houses</p> Signup and view all the answers

    What is the effect of high inflation on the purchasing power of money balances?

    <p>It erodes the purchasing power.</p> Signup and view all the answers

    Which of the following was noted during Phillip Cagan's study of hyperinflation?

    <p>Real balances decreased substantially with increasing inflation.</p> Signup and view all the answers

    In the context of very high inflation, which of the following is a possible advantage of holding groceries instead of currency?

    <p>Groceries maintain their real value better than money.</p> Signup and view all the answers

    What is a major alternative cost of holding money according to the content?

    <p>The opportunity cost of purchasing non-financial assets</p> Signup and view all the answers

    During hyperinflation, what drastic change was noted in Germany in 1922–1923?

    <p>Real balances fell to 1/20th of their preinflation level</p> Signup and view all the answers

    How do high inflation rates impact the choice between real and financial assets?

    <p>They encourage shifting away from money towards real assets.</p> Signup and view all the answers

    How does velocity behave during recessions relative to trend?

    <p>Velocity is low because people save more.</p> Signup and view all the answers

    What mechanism can the Fed use to influence velocity?

    <p>Change the federal interest rates.</p> Signup and view all the answers

    In the transactions demand-for-money model, how would a firm determine its money holdings if sales are steady?

    <p>By considering payroll timing and transaction needs.</p> Signup and view all the answers

    What is the most important factor influencing an individual's average cash balance?

    <p>The transaction costs incurred.</p> Signup and view all the answers

    With an income of $1,600 and a transaction cost of $1, what best describes the cash management strategy?

    <p>Withdraw money just before transactions to minimize costs.</p> Signup and view all the answers

    If income rises to $1,800, how would this affect the individual's demand for money?

    <p>Demand for money increases in line with income.</p> Signup and view all the answers

    What measures can be used to determine the velocity of money?

    <p>Either M1 or M2 by correlating with GDP.</p> Signup and view all the answers

    What is the relationship between M1 velocity and M2 velocity?

    <p>M1 velocity is higher than M2 velocity generally.</p> Signup and view all the answers

    Study Notes

    Monetary Aggregates in the U.S.

    • Two primary monetary aggregates: M1 and M2.

    • M1 Components:

      • Currency: Coins and notes in circulation.
      • Demand Deposits: Non-interest-bearing checking accounts, excluding certain deposits.
      • Traveler’s Checks: Only nonbank-issued checks.
      • Other Checkable Deposits: Interest-earning checking accounts with various arrangements.

    • M2 Components:

      • Includes all of M1 plus:
        • Money Market Mutual Fund (MMMF) Shares: Interest-earning checkable deposits in mutual funds.
        • Money Market Deposit Accounts (MMDAs): Bank-run MMMFs insured up to $100,000.
        • Savings Deposits: Non-transferable deposits at banks often recorded in passbooks.
        • Small Time Deposits: Interest-bearing deposits with a specified maturity less than $100,000.

    Evolution and Context of Money Supply

    • Rapid growth of MMDAs after their introduction in 1982, rising from zero to $320 billion in months.
    • Concept of money supply is dynamic, with changing definitions based on assets serving as a medium of exchange.
    • Debates exist regarding the inclusion of items like credit cards and high-denomination bills in monetary definitions.

    Functions of Money

    • Money acts as both a medium of exchange and a unit of account, although they don't have to be the same.
    • In high-inflation countries, foreign currencies often become the unit of account.

    Cash Holdings in U.S. Households

    • 1995 survey indicated an average of 100cashheldpersurveyedperson,whiletotalcurrencyoutstandingpercapitawas100 cash held per surveyed person, while total currency outstanding per capita was 100cashheldpersurveyedperson,whiletotalcurrencyoutstandingpercapitawas1,375.
    • Significant amounts of cash are held outside the U.S. for various purposes, including illegal activities.
    • Roughly half of U.S. currency is held abroad, illustrating international reliance on U.S. dollars.

    Demand for Money and High Inflation

    • Real balances demand is influenced by the yield on alternative assets, like Treasury bills.
    • In high inflation, individuals may prefer holding real assets (goods) over money, preserving real value.
    • Historical instances, such as hyperinflation in Germany (1922-1923), showed drastic declines in real balances.

    Application and Empirical Observations

    • Firm's cash management decisions impacted by steady sales and payroll timing.
    • The transactions demand-for-money model is relevant for understanding individual and corporate money holdings.
    • Empirical investigation of M1 and M2 velocity is encouraged using data from the Federal Reserve.
    • Current examination of per capita currency reflects possible shifts compared to historical data.

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    Description

    This quiz explores the components of the main monetary aggregates in the United States, specifically M1 and M2. You will learn about the distinctions between these two measures and their relevance in economic analysis. Perfect for economics students and anyone interested in understanding money supply.

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