Question

Suppose that a small country currently has \(4 million of currency in circulation, \)6 million of checkable deposits, \(200 million of savings deposits, \)40 million of small-denominated time deposits, and \(30 million of money market mutual fund deposits. From these numbers we see that this small country’s M1 money supply is _______ , while its M2 money supply is  _______.

a. \)10 million; \(280 million

b. \)10 million; \(270 million

c. \)210 million; \(280 million

d. \)250 million; $270 million

Short answer

The correct answer is option a) $10 million; $280 million.

Step-by-step solution

Step 1. Explanation for the correct option

The M1 money supply consists of currency in circulation, checkable deposits, and traveler’s checks. The M1 money supply in the country is:

• Currency in circulation is $4 million

• Checkable deposits are $6 million

M1 = $4 million + $6 million =$10 million

The M2 money supply consists of M1 and savings deposits, small-term deposits, and shares in money market mutual funds. The M2 money supply of the country will be:

• Savings deposits are $200 million

• Time deposits are $40 million

• Money market funds are $30 million

• The M1 money supply is $ 10 million

The M2 money supply = $240 million + $40 million + $30million + $10 million

= $280 million

So the M1 money supply is $10 million, and the M2 money supply is $280 million.