Question

3.) Is each of the following assets part of M1, the monetary base, or both?

a.) A $100 deposit in a checking account at Wells Fargo

b.) A $100 deposit in Wells Fargo’s reserve account at the Federal Reserve Bank of New York

c.) A $100 bill in your wallet

Answer 1

# M1 consists of coins and currency in (i) circulation and (ii) checkable (demand) deposits.

# Monetary Base consists of (i) currency in circulation, (ii) vault cash that is, cash kept by banks or other financial institutions for meeting daily demand for currency/money and, (iii) reserves at Federal Bank kept by commercial banks.

a) A $100 deposit in a checking account at Wells Fargo is a part of M1. This is because it is a checkable deposit.

b) A $100 deposit in Wells Fargo’s reserve account at the Federal Reserve Bank of New York is a part of the monetary base.

c) A $100 bill in your wallet is a part of both M1 and monetary base since it is currency in circulation.