What determines whether a financial asset is included in the M1 money supply?

2. What determines whether a financial asset is included in the M1 money supply?

Although M1 is not inclusive of financial assets such as bonds and savings accounts, M1 money supply comprises checkable deposits, the currency in circulation, as well as, the traveler’s checks. Therefore, other non-physical assets that are derived from underlying contractual claims can be included in the M1 money supply. The interest-earning saving accounts and treasury bills are not included in M1 because the United States does not use M1 as a monetary policy guide due to a lack of correlation between other economic variables and M1.

5. Why are banks able to maintain reserves that are only a fraction of the demand and saving deposits of their customers? Is your money safe in a bank? Why or why not?

Banks hold a fraction of the saving and demand deposits of their respective customers because the banks are aware of the fact that there exists an extremely low probability that their customers could withdraw all their money in one day. For example, every time a customer withdraws money from a particular bank, several other customers are depositing their money in the same bank. In so doing, there is a balance between deposits and withdrawals; therefore, banks function normally by holding a fraction of saving and demand deposits. The bank ends up earning sufficient income for its operations and gains profit through investing and lending its remaining reserves. Although banks lack enough reserve to repay its depositors in case of a failure, the depositors’ money is safe because modern banks insurer all its money.

13. Are the following statements true or false?
14. “You can never have too much money.”

True

1. “When you deposit currency in a commercial bank, cash goes out of circulation and the money supply declines.”

False

1. “If the Fed would create more money, Americans would achieve a higher standard of living.

False

15. How would the following influence the growth rates of the M1 and M2 money supply figures over time?”
16. an increase in the quantity of U.S. currency held overseas

An increment in the quantity of U.S currency held overseas will significantly decrease the stability of M1 money supply because of a shortage of money to be spent. On the other hand, M2 will significantly increase resulting in the interest originating from the international banks.

1. a shift of funds from interest-earning checking deposits to money market mutual funds

A shift of funds will reduce M1 since the interest-earning checking deposits are available in M1 money supply. On the other hand, M2 will increase significantly because the money market mutual funds are available in M2 money supply.

1. a reduction in the holdings of currency by the general public because debit cards have become more popular and widely accepted

In an event where the debit card would become more popular M1 would reduce because M1 is inclusive of the currency held by the public. On the other hand, M2 will significantly increase due to the increment of saving accounts.

1. the shift of funds from money market mutual funds into stock and bond mutual funds because the fees to invest in the latter has declined

The shift will reduce M1 because money market mutual funds are available in M1 money supply while M2 will increase because stock and bonds are available in M2 money supply.

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