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27 April, 10:20

Identify whether each of the following examples belongs in M1 or M2. If an example belongs in both, be sure to check both boxes.

1. Lorenzo has a roll of quarters that he just withdrew from the bank to do laundry.

2. Teresa has $8,000 in a two-year certificate of deposit (CD).

3. Sam has $25,000 in a money market account.

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Answers (1)
  1. 27 April, 11:52
    0
    1. M1 and M2

    2. M2

    3. M2

    Explanation:

    M1 and M2 are the monetary aggregates.

    M1 includes = Currency with the public + Demand deposits + Other deposits with the RBI

    M1 is most liquefied among all of the monetary aggregates because it includes cash and other highly liquefied assets.

    M2 includes = M1 + Post office savings deposits + non-institutional money market fund + small time deposits

    1. The withdrawal from the bank reduces the M1 and we know that M1 is a component of M2, so M2 also falls. Therefore, this transaction belongs to both M1 and M2.

    2. Certificate of deposits of $8,000 for a two year is a component of M2 monetary aggregates because small time deposits are a part of M2.

    3. The amount of money as the non-institutional money market funds is a part of M2.
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