Podcast
Questions and Answers
In high-inflation countries, what often becomes the unit of account despite the existence of local currency?
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?
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?
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?
What is a significant reason some currency is held outside of the United States?
What percentage of U.S. currency is estimated to be held outside the United States?
What percentage of U.S. currency is estimated to be held outside the United States?
What was the estimated annual flow of U.S. currency abroad in 1995?
What was the estimated annual flow of U.S. currency abroad in 1995?
What does the survey indicate about household admission of currency holdings?
What does the survey indicate about household admission of currency holdings?
What is generally regarded as the classic statement of the functions of money?
What is generally regarded as the classic statement of the functions of money?
What financial innovation did thrifts create to circumvent the prohibition on checkable accounts?
What financial innovation did thrifts create to circumvent the prohibition on checkable accounts?
What is a characteristic of negotiable CDs?
What is a characteristic of negotiable CDs?
What happened to money market deposit accounts (MMDA) after banks were allowed to issue them in 1982?
What happened to money market deposit accounts (MMDA) after banks were allowed to issue them in 1982?
Which of the following is a common debate regarding the definition of the money supply?
Which of the following is a common debate regarding the definition of the money supply?
What is the primary change to the monetary aggregates expected over time?
What is the primary change to the monetary aggregates expected over time?
What was a notable change regarding the assets defining money supply prior to 1982?
What was a notable change regarding the assets defining money supply prior to 1982?
Which of the following represents a potential issue in defining the components of money supply?
Which of the following represents a potential issue in defining the components of money supply?
What significant characteristic defines money as a remarkable device?
What significant characteristic defines money as a remarkable device?
Which of the following components is NOT included in M1?
Which of the following components is NOT included in M1?
What is the definition of demand deposits as stated in the monetary aggregates?
What is the definition of demand deposits as stated in the monetary aggregates?
Which of the following is considered part of M2?
Which of the following is considered part of M2?
How does M2 define small time deposits?
How does M2 define small time deposits?
Which of the following is true about money market mutual fund (MMMF) shares?
Which of the following is true about money market mutual fund (MMMF) shares?
What distinguishes a money market deposit account (MMDA) from regular MMMFs?
What distinguishes a money market deposit account (MMDA) from regular MMMFs?
What component is counted in M2 but not in M1?
What component is counted in M2 but not in M1?
How are traveler’s checks categorized based on the provided definitions?
How are traveler’s checks categorized based on the provided definitions?
What primarily influences the demand for real balances?
What primarily influences the demand for real balances?
In high inflation scenarios, households may prefer to hold wealth in what form?
In high inflation scenarios, households may prefer to hold wealth in what form?
What is the effect of high inflation on the purchasing power of money balances?
What is the effect of high inflation on the purchasing power of money balances?
Which of the following was noted during Phillip Cagan's study of hyperinflation?
Which of the following was noted during Phillip Cagan's study of hyperinflation?
In the context of very high inflation, which of the following is a possible advantage of holding groceries instead of currency?
In the context of very high inflation, which of the following is a possible advantage of holding groceries instead of currency?
What is a major alternative cost of holding money according to the content?
What is a major alternative cost of holding money according to the content?
During hyperinflation, what drastic change was noted in Germany in 1922–1923?
During hyperinflation, what drastic change was noted in Germany in 1922–1923?
How do high inflation rates impact the choice between real and financial assets?
How do high inflation rates impact the choice between real and financial assets?
How does velocity behave during recessions relative to trend?
How does velocity behave during recessions relative to trend?
What mechanism can the Fed use to influence velocity?
What mechanism can the Fed use to influence velocity?
In the transactions demand-for-money model, how would a firm determine its money holdings if sales are steady?
In the transactions demand-for-money model, how would a firm determine its money holdings if sales are steady?
What is the most important factor influencing an individual's average cash balance?
What is the most important factor influencing an individual's average cash balance?
With an income of $1,600 and a transaction cost of $1, what best describes the cash management strategy?
With an income of $1,600 and a transaction cost of $1, what best describes the cash management strategy?
If income rises to $1,800, how would this affect the individual's demand for money?
If income rises to $1,800, how would this affect the individual's demand for money?
What measures can be used to determine the velocity of money?
What measures can be used to determine the velocity of money?
What is the relationship between M1 velocity and M2 velocity?
What is the relationship between M1 velocity and M2 velocity?
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.
- Includes all of M1 plus:
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.
