Answered: Suppose a small country has the…

Economics: Private and Public Choice (MindTap Course List)

16th Edition

ISBN:9781305506725

Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Publisher:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Chapter13: Money And The Banking System

Section: Chapter Questions

Problem 8CQ

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Question

Suppose a small country has the following monies in circulation:

Cash/currency: $5 million

Checkable deposits: $14 million

Small-denomination time deposits: $15 million

Savings deposits: $20 million

Money market deposit accounts: $25 million

Share in retail money market mutual funds: $11 million

Calculate the value of M1 and M2.

Now suppose bank customers transfer $10 million from their savings accounts to their checking accounts. What will happen to the value of M1 and M2 (i.e., will they rise, fall, or stay the same)?

Definition Definition Financial market that deals in securities or assets that are short-term in nature. The money market is responsible for keeping up the liquidity of the businesses and the organizations. These securities are usually held for a period of 12 months or less and are issued by institutions that require cash or funds for their short-term cash flow requirements. The money market is regulated by the federal government.

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