Chapter 16 – Money, the Money Supply (M1 & M2), and Related Concepts

These flashcards review core ideas from Chapter 16 on the definitions and components of money (M1 & M2), distinctions among money, income, and wealth, and how common transactions affect the monetary aggregates.

Which financial asset is included in M2 but NOT in M1?

Money market deposit accounts in banks.

Why does the Federal Reserve maintain both an M1 and an M2 definition of the money supply?

Because M1 is a narrow, highly liquid definition, whereas M2 is a broader definition that adds somewhat less-liquid assets.

Distinguish among money, income, and wealth for an individual.

Money = currency held + checking account balance; Income = earnings from work or other sources over time; Wealth = total value of assets minus liabilities.

The money supply controlled by a country’s central bank equals what components?

Currency held by the public plus their checking and savings account balances.

Which items are NOT counted in M1: coins in pocket, checking funds, savings funds, leftover traveler’s check, or a credit card?

Savings account funds and the credit card (items c & e).

Is income a measure of wealth?

No. Income measures yearly earnings; wealth is the value of personal assets minus debts.

Effect on M1 of withdrawing $100 in cash from a checking account (ignore bank actions):

No change; currency goes up $100 and checking deposits fall $100.

Withdrawing $1,000 from a money-market mutual fund and placing it in a checking account affects the aggregates how?

M1 increases; M2 remains unchanged.

Why is the amount of U.S. currency in circulation far larger than what U.S. residents hold day-to-day?

Because more than half of all U.S. currency is held outside U.S. borders.

Because so much U.S. currency is abroad, which monetary aggregate is a poor measure of the U.S. money supply?

M1.

If the Treasury revalued the penny so each became worth 5 cents, would the larger M1 total have much macroeconomic impact?

No; the change in measured M1 would be small relative to the overall economy.

Given: Currency $100, Checking $800, Traveler’s checks $10. What is M1?

$910.

Given: Currency $900, Checking $1,400, Traveler’s checks $10, Savings $3,000, Small time deposits $5,000, MMDAs $1,000, Non-inst. MMMFs $2,000. What is M2?

$13,310.

Are credit cards included in the money supply (M1 or M2)?

No; they are included in neither M1 nor M2.

Why does M1 include more than just currency?

Because other assets such as checking deposits can also be used directly to buy goods and services.

A large average of currency per U.S. resident can be explained chiefly by what?

Many U.S. dollars are held abroad by foreigners.

Which assets does the M2 definition add to M1?

Savings accounts, small-denomination time deposits, and money-market balances.

Which statement about M2 is NOT correct?

“M2 is the best definition of money as a medium of exchange.” (It is broader but less liquid than M1.)

You transfer $100 from savings to checking. How do the aggregates change?

M1 rises by $100; M2 is unchanged.

Which components make up the M1 money supply?

Currency in circulation, checking account deposits, and traveler’s checks.

Savings accounts, small time deposits, and noninstitutional money-market funds belong to which aggregate(s)?

They are included in M2 only.

Jill deposits $100 cash into her savings account. What happens to the money aggregates?

M1 decreases by $100; M2 stays the same.