Question

Identify whether each of the following examples belongs in M1 or M2. If an example belongs in both, be sure to check both boxes.

1. Lorenzo has a roll of quarters that he just withdrew from the bank to do laundry.
2. Teresa has $8,000 in a two-year certificate of deposit (CD).
3. Sam has $25,000 in a money market account.

Answer 1

1. M1 and M2

2. M2

3. M2

Step-by-step explanation:

M1 and M2 are the monetary aggregates.

M1 includes = Currency with the public + Demand deposits + Other deposits with the RBI

M1 is most liquefied among all of the monetary aggregates because it includes cash and other highly liquefied assets.

M2 includes = M1 + Post office savings deposits + non-institutional money market fund + small time deposits

1. The withdrawal from the bank reduces the M1 and we know that M1 is a component of M2, so M2 also falls. Therefore, this transaction belongs to both M1 and M2.

2. Certificate of deposits of $8,000 for a two year is a component of M2 monetary aggregates because small time deposits are a part of M2.

3. The amount of money as the non-institutional money market funds is a part of M2.