Question

1. Define M1 and M2 money aggregates, carefully listing their components.

1. Describe the concept of liquidity with respect to an asset. Be able to rank assets in order of their liquidity.

Answer 1

A monetary aggregate is a structured means of accounting for money, such as cash or money market funds. Monetary aggregates are used to calculate the supply of money in a national economy. The monetary base is an aggregate that contains the total supply of circulating currency plus the accumulated portion of commercial bank reserves within the central bank.

M0: circulating physical paper and coin currency, also known as currency base

M1: all M0, plus traveler checks and demand deposits

M2: all M1, money market shares, and savings deposits.

M1 is a limited measure of money supply that includes physical cash, demand deposits, traveler checks and other deposits that can be verified. M2 is a money supply calculation which includes all elements of M1 as well as "close money," referring to savings deposits, money market securities, mutual funds and other time deposits. Such assets are less flexible than M1 and not as appropriate as exchange papers, but can be quickly transformed into cash or deposit checking.

M1 money supply comprises circulating coins and currency — the coins and bills that exist in an economy not controlled by the United States. Treasury, at the Bank of the Federal Reserve or in vaults of banks. Checkable deposits are closely related to currencies, also known as demand deposits. These are the numbers of accounts kept in checking. These are called demand deposits or checkable deposits, because when a check is written or a debit card is used, the banking institution will give the deposit holder his money "on request." Those things together — currency, and bank checking accounts— make up the definition of money known as M1, which the Federal Reserve System tests daily.

A wider concept of capital, M2 includes all of M1 but also incorporates other deposit forms. For example, M2 contains savings deposits in banks that are bank accounts you can't write a check directly on, but from which you can easily withdraw the money on an automatic teller machine or atm. Most banks and other financial institutions also offer an opportunity to invest in money market funds, where many individual investors ' deposits are pooled together and invested in a secure way, like short-term government bonds. Another component of M2 is the relatively small (that is, less than $100,000) deposit (CD) or time deposit certificates