Question

2. a.)Discuss the main differences between the M1 and M2 money supply.

b.)When the term "conventional monetary policy" is used, what is the Federal Reserve doing to control the money supply?

Answer 1

a) The main difference between the M1 and the M2 is the liquidity of the money. M1 is the most liquid part of the money in the market. It holds the reserves that are cash and can be easily converted to cash, they are most liquid.

M2 on the other hand is considered as near cash or they are liquid but not as much as the m1 money, they can be converted to cash but with some effort. they are securities, mutual funds etc.

b) A conventional monetary policy means use of the discount rate or the open market operation and the reserve ratio to manage the monetary policy. Fed is going to sell or buy the bonds in the pen market, increase or decrease the reserve ratio and discount rate,