Question

Suppose that a small country currently has $4 million of currency in circulation, $6 million of checkable deposits, $200 million of savings deposits, $40 million of small-denominated time deposits, and $30 million of money market mutual fund deposits. From these numbers we see that this small country's M1 money supply is ___________, while its M2 money supply is ____________.

Answer 1

Answer:

M1 = $10 million

M2 = $280 million

Explanation:

Data provided in the question:

Currency in circulation = $4 million

Checkable deposits = $6 million

Savings deposits = $200 million

Small-denominated time deposits = $40 million

Market mutual fund deposits = $30 million

Now,

M1 includes the currency in the circulation and demand deposit.

i.e the currency circulation and checkable deposit.

Thus,

M1 = currency in circulation + checkable deposits

or

M1 = $4 million + $6 million

or

M1 = $10 million

and,

M2 is broader measure of money supply which also includes the savings

Therefore,

M2 = Currency in circulation + Checkable deposits + Savings deposits + Small-denominated time deposits + Market mutual fund deposits

= $4 million + $6 million + $200 million + $40 million + $30 million

= $280 million