Question

Here are several facts which may be necessary to calculate the money supply (M1) for the U.S. as of May 1st. 2019:

1. Currency $1.5 trillion.

2. Checking Accounts at U.S. Banks $2.5 trillion

3. Credit Card balances $3 trillion

4. Savings Accounts $5 trillion

Do the following as your answer: A. Calculate M1 B. Write a sentence comparing the M1 you calculate to m1 of $3.1 trillion in February 2016. C. Write a second sentence indicating how the FED can help to change the M1 if it wants to.

(Be sure to write in complete sentences, and show all work for the calculation.)

Answer 1

Part A

M1 for 2019

= Currency + Checking Accounts at US banks

= 1.5 + 2.5 = $4 trillion

M1 as on May 2019 was $4 Trillion.

Part B

M1 in May 2019 was more as compared to M1 in February 2016 which stood at $3.1 trillion. There was increase of about $0.9 Trillion in May 2019 as compared to Feb 2016.

Part C

M1 money supply = cash in the hands of the public + checkable deposits + travelers checks.

Low rates of interest encourage banks to lend more and people also borrow more as cost of borrowing is reduced. From borrowers' perspective, demand for loans increases as the price of borrowing falls. At the same time, the incentive to slash savings in interest-bearing accounts falls, so checking account deposits rise. All of these effects push up M1.