Question

1. Indicate whether each of the following is part of M1, M2, or neither. a. $95 on your campus card. b. $0.55 in the change cup of your car. C. $1,663 in your savings account. d. $459 in your checking account. 2. Using the quantity theory of money equation M*V=P*Y, if real GDP is $1000 and the price level $100 and if the velocity of money is constant at 5, a. how much money will be in the economy (money supply)? b. If GDP were to increase by 10% while prices and velocity remain unchanged, how much money will the economy need to keep the equation equal?

Answer 1

M1= currency and coins + checkable deposits + Traveler’s checks

M2=M1 + saving deposit, including money market deposit accounts +small time deposit+ Money market funds held by individuals.

It means $95 on your campus card is neither part of M1 nor M2.

It means $0.55 in the change cup of your car is neither part of M1 nor M2.

$1,663 in the saving account is part of M2 only.

$459 in the checking account is part of M1 and M2 both.

2.

According to quantity theory of money

M*V=P*Y

Real GDP (Y)=$1000

P=$100

V=5

M*V=P*Y

M*5=100*1000

M=$100,000 /5

Money supply =20,000

b.

If GDP increase by 10% then new GDP

=10% of GDP

=0.1*1000

=$100

New GDP=1000+100

=$1100

M*V=P*Y

M*5=100*1100

M=110,000/5

=22,000

The required money supply is 22,000.

Answer 2

ANSWER :

1.

a. Neither

b. Neither

c. M2 only

d. M1 and M2 both 

2.

a.

M V = P Y 

=> M = P Y / V = 100 * 1000 / 5 = 20000 ($) (ANSWER).

b.

M = P Y / V 

If P and Y remain unchanged, M is directly proportional to Y .

So, if Y increases by 10%, M will also increase by 10%

Hence, new M = 20000 * 1.1 = 22000 ($) (ANSWER)