Question

In April 2009, year-over-year the growth rate of M1 fell to 6.1%, while the growth rate of M2 rose to 10.3%. In September 2013, the growth rate of the M1 money supply was 6.5%, while the growth rate of the M2 money supply was about 8.3%. How should Federal Reserve policymakers interpret these changes in the growth rates of M1 and M2?

Short answer

The Federal Reserve policymakers can interpret that growth rate of M1 and M2 are both expansionary and contractionary.

Step-by-step solution

Step 1. Introduction

Money is something that facilitates exchange in economic transactions by acting as a medium. Currency, checks, deposits, etc. are all components of money supply. DIfferent measures of money supply are M1, M2, M3, and M4.

Step 2. Explanation

The M1 growth rate declined by 0.4 percent during the time period in question, while the M2 growth rate climbed by 2.0 percent. Because both growth rates shifted in different directions, judging the appropriateness of monetary policy only on the basis of money supply measurements is problematic. One metric implies that monetary policy is more expansionary, while the other metric indicates the monetary policy is more contractionary.