Question

1. Use the following information to answer questions 2 and 3.

Currency held by public: $400M

Savings deposits: 300M

Checking deposits: 100M

Traveler’s checks: 50M

Shares in retail money market mutual funds: 80M

2. What is the M1?

Select the correct answer

$450M

$550M

$630M

$930M

3.What is the M2?

Select the correct answer

$450M

$550M

$630M

$930M

Answer 1

M1 is the most liquid form of money that a person has an access to:

• M1 = coins and currency in circulation + checkable deposits + Traveler’s checks
• M1 = 400 + 100 + 50 = $550

M2 is slightly broader definition, it includes M1 and a few other deposits which require greater effort to convert into cash i.e have slightly lower liquidity than the components of M1:

• M2 = M1 + savings deposits + Mutual funds + certificates of deposit (CDs)
• M2 = 550 + 300 + 80 + 0
• M2 = $930