Explain what is included in M1 and M2. Is all of M1 money? Is all ...

[mpobi80]

Explain what is included in M1 and M2. Is all of M1 money? Is all of M2 money?
 
  What will be an ideal response?

Question 2

Suppose the real interest rate increases from 4 percent to 6 percent. As a result,
 
  A) governments decrease their demand for loanable funds.
  B) firms increase their demand for loanable funds.
  C) governments increase the supply of loanable funds.
  D) firms decrease the quantity demanded of loanable funds.
  E) governments decrease the quantity supplied of loanable funds.

[ju]

Answer to Question 1

M1 is equal to the sum of currency held by individuals and businesses plus traveler's checks plus checking deposits owned by individuals and businesses. These assets are all money because they are all a means of payment. M2 is equal to M1 plus saving deposits plus small time deposits plus money market funds. Not all of M2 is money because not all of M2 are a means of payment. In other words, some parts of M2, such as time deposits, cannot be used directly to make a purchase.

Answer to Question 2

D

[mpobi80]

TYSM

[olderstudent]

Excellent