Chapter 5R, Problem 3CTQ

To determine

The M1 and M2 on a graph along with reason if they can cross each other or not.

Explanation of Solution

M1 and M2 are two measures of money supply where M1 measures the narrowest monetary aggregates and M2 measures the money supply of broader category assets. M1 includes currency in circulation, checkable deposits, etc. whereas M2 includes near-money or other assets that can be converted into checkable deposits easily.

On a graph, M1 and M2 are placed on the vertical axis and time on the horizontal axis, then these two lines will never cross each other due to different growth rates. M1 includes only liquid assets whereas M2 includes less liquid assets which can be converted into cash easily. M2 is the broader aspect of money in comparison to M1. With time, M1 and M2 changes are parallel which means if M1 changes then M2 also changes with greater impact as it includes more assets.

Economics Concept Introduction

Federal Reserve: Federal Reserve is the central bank that is responsible for controlling the country’s financial banking system. It has a basic tool by which it can regulate the money in the market which is referred to as open market operations.