Chapter 3: Q.1 (page 110)
Why is simply counting currency an inadequate measure of money?
Counting currency is inadequate measure because, it does not cover entire money supply of the economy.
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If you use an online payment system such as PayPal to purchase goods or services on the Internet, does this affect the M1 money supply, the M2 money supply, both, or neither? Explain
Explain the concept of liquidity.
Rank the following assets from most liquid to least liquid:
a. Land
b. The inventory of a merchandiser
c. Cash in hand
d. A savings account at a local bank
e. A one-year bond
f. Ordinary shares
Over several hundred years, payments systems used in countries across the world have evolved. For each of the following situations identify the type of payment utilized and at least one reason why economies are moving from checks to electronic payments.
a. Sheila visits a local grocery store to purchase a dozen eggs and a bag of dog food. She uses a €100 note to pay for the goods.
b. Rachael Garcia, a manager at Proxall Pharmacy, used a piece of gold worth $20 to pay for office supplies she needed this month.
c. Edward has just moved to the city to be closer to his office. He was shopping online for some pieces of furniture and he bought a wardrobe and a table lamp. He used a checking account to initiate an automatic bill payment for the items.
Which of the Federal Reserve’s measures of the monetary aggregates—M1 or M2—is composed of the most liquid assets? Which is the larger measure?
19. The table below shows hypothetical values, in billions of dollars, of different forms of money.
a. Use the table to calculate the M1 and M2 money supplies for each year, as well as the growth rates of the M1 and M2 money supplies from the previous year.
b. Why are the growth rates of M1 and M2 so different? Explain.
| 2019 | 2020 | 2021 | 2022 | |
| Currency | 880 | 895 | 900 | 906 |
| Money market mutual fund shares | 680 | 685 | 683 | 692 |
| Saving account deposits | 5,500 | 5,780 | 5,968 | 6,105 |
| Money market deposit accounts | 1,214 | 1,245 | 1,274 | 1,329 |
| Demand and checkable deposits | 1,000 | 972 | 980 | 993 |
| Small denomination time deposits | 840 | 871 | 1,133 | 1,576 |
| Traveler's check | 5 | 5 | 4 | 3 |
| 3-month treasury bills | 1,986 | 2,374 | 2,436 | 2,502 |
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