Question

Determine if included in M1, M2 or both:

1) Coins in piggy bank
2) Money in IRA, which is invested in stocks and bonds and can't access until retirement
3) 3 Month CD bought in August and will mature in time to pay Dec. rent
4) Checking account with balance $339.88
5) Available credit on credit card.

Answer 1

Coins in a piggy bank are M1; IRA investments aren't included in M1 or M2; a 3-month CD is M2; a checking account balance is M1; available credit on a credit card is neither M1 nor M2.

Step-by-step explanation:

To determine if items would be included in M1, M2, or neither, we need to understand what constitutes each category. M1 includes the most liquid forms of money, such as cash and checking account balances, while M2 includes M1 plus savings accounts, time deposits, and money market mutual funds.

• Coins in a piggy bank are part of M1 as they are considered currency in circulation.
• Money in an IRA (Individual Retirement Account), invested in stocks and bonds, is not included in M1 or M2, as it is not liquid – it cannot be accessed for immediate spending without penalties.
• A 3-month CD (Certificate of Deposit) that will mature soon is included in M2, as CDs are time deposits.
• The checking account balance of $339.88 is included in M1 because it is easily accessible for transactions.
• Available credit on a credit card is neither M1 nor M2, as it represents potential borrowing capacity, not actual money in circulation.

It's important to know the distinction to assess the liquidity of various forms of money and understand economic indicators.