Chapter 14, Problem 18AA

To determine

To ascertain: The values included in M1 and M2 while defining money supply.

Explanation of Solution

The supply of cash is generally defined as a secure asset that can be used by households and businesses to make payments or to keep short-term investments. For instance, several indicators of money supply include U.S. currency and balances kept in checking accounts and savings accounts.

Delivering money is the value of capital that circulates in an economy. The money for circulation comprises cash, paper bills, bank account money, and other financial properties. M1 contains all bills and coins cash, all checkable deposits, and traveler's checks. Whereas M2 contains all in M1 and savings deposits, small time deposits-denomination, deposit accounts of money market, retail mutual fund balances, and other more specialized account balances.

  $\begin{array}{l}M1=C+DD+OD\\ C=currencyheldbythepublic.DD=demanddeposits,OD=otherdeposits\\ M2=M1+Savingsdepositswithpostoffice\end{array}$