Question

If Charlie Bogle makes a checking deposit of $400 in cash at MetroBank, which measure(s) of the money supply change as a result of just this transaction (ignoring any future transactions)? Explain

Answer 1

Money supply can be measured using M0, M1, M2, M3, and M4 and not all of them are used frequently.M0 and M1, also called narrow money, normally include coins and notes in circulation and other money equivalents that are easily convertible into cash. M2 includes M1 plus short-term time deposits in banks and 24-hour money market funds. M3 includes M2 plus longer-term time deposits and money market funds with more than 24-hour maturity. The exact definitions of the three measures depend on the country. M4 includes M3 plus other deposits.

Thus when we make a $400 cash deposit and ignoring future transactions, it would impact M1 which as mentioned above includes very liquid instruments.