Question

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. 2011 2012 A Currency 1040 1060 B. Money market mutual fund shares 677 678 C. Saving account deposits 5,980 D. Money market deposit accounts 1,200 1,231 E. Demand and checkable deposits 1,010 F. Small denomination time 830 deposits G. Traveler's checks H. Three-month Treasury bills 2,384 1.996 1. Repurchase Agreements 1,031 201) 1,543 . T. . TUTT Ariol a

Answer 1

a) M1 = Currency deposits + Demand deposits + Traveller's check = A + E + G

2011 = 1040 + 1010 + 4 = 2054

2012 = 1060 + 982 + 4 = 2046

Growth rate = (2046 - 2054) / 2054 = (-)0.00389 or (-)0.389%

M2 = M1 + Money market deposits + Savings deposits + time deposits + repurchase agreements + money market mutual funds shares = M1 + B + C + D + F + I

2011 = 2054 + 677 + 5700 + 1200 + 830 + 1031 = 11,492

2012 = 2046 + 678 + 5980 + 1231 + 861 + 1543 = 12,339

Growth rate = (12339 - 11492)/ 11492 = 0.737 or 7.37%

b) Their growth rates are different because M2 is a broader measure as it includes M1 which is cash and checking deposits as well as easily convertible deposits/ instruments.