Question

A new country is created and one bank opens its doors, First Bank. The Federal Reserve prints $278 that ends up at First Bank. Then a depositor, John Chen, from another country converts his actually money denominated in yen to dollars and deposits $450. The bank then creates $725 dollars in new loans. What is M0 and M1?

A. M0=$728, M1=$1453

B. M0=$278, M1=$728

C. M0=$450, M1=$1453

D. M0=$728, M1=$725

Answer 1

The correct option is A

M0 Money supply refers to the narrow money and it includes the currency in circulation which includes cash, Convertible deposits etc, The bank must have to maintain these depositor's money in cash itself to maintain the money supply.

M1 Money supply includes all the items in M0 but also includes the Demand Deposits, Checking Deposits etc.

In this question, Money printed by Fed and depositor money is M0 Money

= 278 + 450

= $728

While M1 also includes the new loans creation

= 728 + 725

= $1453