Question

MACROECONOMICS Multiple choice question regarding M1 definition of money--PLEASE EXPLAIN YOUR CHOICE.

i. PART 1

What is one of the basic reasons for focusing on the M1 definition of money?

A) Only the components of M1 are regarded as liquid?

B) Statistics Canada is able to gather data for the components of M1, but cannot do so for M2 and M3.

C) Only the components of M1 can be used as a store of wealth.

D) Its components all have direct and immediate control over goods and services.

E) Only the components of M1 are regarded as secure and are able to retain their value.

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ii. PART 2

Why are notice deposits not included in the M1 definition of money?

A) Because the real value of notice deposits is zero.

B) Because the value of notice deposits is much less stable than that of demand demand deposits and currency.

C) Because they do not have direct or immediate access to goods and services.

D) Because they are not recognized in law as legal tender.

E) Because in terms of volume they are much less than demand deposits

PLEASE EXPLAIN YOUR CHOICE. I am asking this question again by chegg.

Answer 1

Part 1, option D is right

M1 is called Transactions money as it consis of money that can be directly used to facilitate exchange or the purchase of goods and services. & consists of currency held outside banks, checking account monies, demand deposits, travelers checks, and other checkable deposits.

M1 contains most liquid component of money supply because it contains currency and assets that can be quickly converted to cash.

But this is not the sole reason for focussing on M1

It does not include financial assets like savings accounts.

So option E is wrong bcoz saving accounts are secure & are able to retain their value, but not included in M1, thus it's not that Only the components of M1 are regarded as secure and are able to retain their value., , c is too wrong, bcoz financial assets also store the wealth

Part 2) option C is right .

Notice account is a type of saving account held with a financial institution that permits withdrawals without penalty only after advance notification is given. .

Thus it is not used to directly buy the goods & services