Question

You have learned monetary policy in this course.

1) How is money supply M1 defined? How is money supply M2 defined?

2) How can the Fed increase money supply?

3) How can the Fed decrease money supply?

Answer 1

1.

Money supply M1 and M2 includes following terms.

M1=Currency+ + traveller’s checks+ transaction deposits

M2=M1 + saving and money market deposits accounts + non-institution Money market funds + small denomination time deposits.

2.

The Fed can increase money supply by open market operations and under it Fed buys bonds from public by money. Hence money supply increases in the economy.

3.

The Fed can decrease money supply by open market operations and under it Fed sells bonds to the public for money. Hence money supply decreases in the economy.