Question

Ted Mosby receives $95,000 after his certificate deposit (time deposit) with Goliath National Bank (GNB) matures. He also receives another $400,000 after selling the shares of Prime Reserve fund, a money market mutual fund. At the same time, he also receives $100,000 after selling his Microsoft shares in the stock market. He uses these receipts in the following way: he uses $50,000 to buy treasury bills. He invests $100,000 in google shares. He deposits $30,000 and $50,000 to his checking and saving accounts, respectively. He then buys two certificate deposits (time deposits) worth of $75,000 and $125,000, respectively. He deposits $120,000 in a money market deposit account with GNB. Finally, he keeps $45,000 in the locker of his home. How will these transactions affect M1 and M2? (To receive full credits, please write the definition/formulas for M1 and M2, and explain how each of these tran sactions influence M1 and M2)

Answer 1

M1 money supply includes coins and currency in circulation—the coins and bills that circulate in an economy that is not held by the U.S. Treasury, at the Federal Reserve Bank, or in bank vaults.

A broader definition of money, M2 includes everything in M1 but also adds other types of deposits

In short, all these types of M2 are money that you can withdraw and spend, but which require a greater effort to do so than the items in M1

M1 money supply includes those monies that are very liquid such as cash, checkable (demand) deposits, and traveler’s checks.

M2 money supply is less liquid in nature and includes M1 plus savings deposits, certificates of deposits, money market funds and time deposits

1. Ted Mosby receives $95,000 after his certificate deposit (time deposit) with Goliath National Bank (GNB) matures - Affects just M2 based on the above definition.

2. Receives another $400,000 after selling the shares of Prime Reserve fund, a money market mutual fund - Affects just M2 based on the above definition.

3. Receives $100,000 after selling his Microsoft shares in the stock market - Doesn't affect M1 and M2

4. He uses $50,000 to buy treasury bills - Affects M2 based on the above definition.

5. Invests $100,000 in Google shares. - Doesn't affect M1 and M2 based on the above definition.

6. Deposits $30,000 to Checking Account - Affects both M1 and M2 based on the above definition.

7. Deposits $50,000 to saving Account - Affects M2 based on the above definition.

8. Buys two certificate deposits (time deposits) worth of $75,000 and $125,000, respectively - Affects M2 based on the above definition.

9. Deposits $120,000 in a money market deposit account with GNB. - Affects M2 based on the above definition.

10. Keeps $45,000 in the locker of his home - Affects M1 and M2