Final answer:
Banks must report transactions over $10,000 as per Anti-Money Laundering Legislation. Various financial elements like checking accounts and traveler's checks fall under M1, while money market accounts are included in M2. Also, to make up a trillion dollars, you would need 100 million stacks of $10,000.
Step-by-step explanation:
Anti-Money Laundering Legislation requires banks to report cash transactions over the amount of $10,000. This is a measure to prevent money laundering by tracking large cash transactions that may indicate illegal activity.
Examples of M1 and M2 Money Supplies
- Your $5,000 line of credit on your Bank of America card - Neither M1 nor M2, as it represents potential borrowing, not actual money.
- $50 dollars' worth of traveler's checks you have not used yet - M1, because traveler's checks are a part of the money supply that is readily available for spending.
- $1 in quarters in your pocket - M1, as it is physical currency.
- $1200 in your checking account - M1, because funds in checking accounts are liquid and spendable on demand.
- $2000 you have in a money market account - M2, as money market accounts are considered near money and are part of a broader money supply.
In a theoretical calculation to understand the magnitude of large numbers, if a bank stack contains one-hundred $100 bills worth $10,000, one would require 100 million such stacks to make up a trillion dollars.
T-Account Example for Humongous Bank
Considering Humongous Bank needs to hold 5% of its $20 million in reserves, the T-account after the first round of loans would show $1 million in reserves with the remaining $19 million loaned out.