Question

Not Started Status Grade Scale Instructions Answer the following questions: Points (max 20.00) 1 Dean Winchester has $10,000 in cash. He deposits $2,000 in his checking account, buys $1,000 of travelar's checks, puts $3,000 in his money-market mutual fund, and buys a $4,000 CD. How does this transaction affect M1 and M2? 2. Sams$100,000 CD matures. He deposits S 10,000 into his checking account, buys a CD for S50,000, and puts $3.000 into his money-market mutual fund. He does this affect M1 and M2? M1 and M2? 4 Describe each of the four functions of money and provide an example of how money serves these roles. 5. Explain why M1 grew rapidly in the early 1990s, whereas M2 did not. NOTES: To successully complete this activity you must complete and submit your work no later than Sunday, 11:55 p.m.

Answer 1

1. To make the question very easy for you, refer to the definition below: M1 money supply includes the money or its form which is very liquid in nature such as cash, checkable (demand) deposits, and traveler’s checks. Of course, the cash with you too. M2 money supply is not as liquid and includes M1 plus savings and time deposits, certificates of deposits, and money market funds.

Therefore, initially M1 is $10000. But now, M1 will be reduced because some money has been allotted for CD and money market funds also.  

M1 = Checking A/c+Traveler's checks
$2000 + $1000 = $3000

M2 = M1+CD+Money Market Funds
$3000 + $3000 + $4000 = $10000

2. Now, since the CD matures. CD, until now was our M2. Thus, this M2 becomes M1 we are again with cash amount to $100000 and our M1. However, this will get reduced owing to the investments in M2.

Therefore, M1 = $100000 - ($50000 + $3000) = $47000
M2 = $47000 + $50000 + $3000 = $100000

3. Again, our M2 was $400000 but on maturity, it is turned back to cash and M1 is $400000.

M1 = $400000 - ($160000 + $200000) = $40000
M2 = $40000+ $160000 + $200000 = $400000

4. 4 functions of money are:
a. Unit of account - Innumerable exchange rates under barter system was problematic. But with the advent of money, the problem was solved. It gave the means to allow the value of something to be expressed in not only understandable way but also a universally acceptable way.
Example - You and your friend pay the same price for a Snickers bar and the shopkeeper accepts it.

b. Store of value - Among all the assets that you know, money is the most liquid in nature and it can be easily put to use. It is a store of value in the sense that you can save your purchasing power from time when you receive your income till the time you decide to spend it on rent or food.

c. Medium of exchange - Barter system relied on the condition of double coincidence of wants between the 2 people involved. However, money did away with this limitation. It freely allows goods and services to be traded.
Example - You can easily go down a grocery store with cash and pay for whatever you buy.

d. Deferred payment - Money has made it easier for you to borrow today and pay back in future in a form which is acceptable to your lender.
Example - You take an education loan for pursuing your Masters. Now when the time for you to pay back the loan comes, you can easily discharge it in the form of money and your lender will accept it.

5. It is generally expected that as the economy grows, money required is more. However, in 1996 and 1997, when the economy grew rapidly, the M1 showed negative growth rate. But in the early 1990s, when the economy was growing slowly, the demand for M1 grew rapidly. This was because of the foreign demand for currency, which happened to be a very large part of M1. In the early 1990s, eastern Europe was in a crisis and it imported the currency of US to keep it as a store of value (as explained above) till their economy stabilized.

6. This is a very interesting case. When people receive pennies, what do they ought to do? Maybe they keep it in their jar or in a pouch and later forget about it. Back in 1999 and 2000, the US found itself running short of coins, especially quarters. In 1999, the source of the problem was in the program to produce quarter dollar coins which depicted scenes of historical importance. It had been decided that will be made for one state at a time ever 10 weeks for 10 years. They grew popular and people started hoarding them while using other denominations of coins for paying. They grew so popular that the Mint started running out of production capacity. During the shortages, the banks were unable to obtain enough coins from their customers and other banks. While this problem focused on producing quarters, as a result, the pennies in the circulation suffered. These coins were lying forgotten under mattresses, in coffee cans or in piggy banks, as you agreed above
In 2000, the shortage occurred because the Mint production capacity was dedicated to producing Sacagawea golden dollars which further caused the shortage.
Companies such as Coinstar placed many machines in supermarkets and retail stores where people could dump all their change in the machines and could get a currency note in exchange equivalent to the value of the coins less service charge (that allowed the company to pay for the machines). As the number of these machines increased, the demand for coins decreased.
Finally in 2001, this shortage subsided.