The following information is available to you: travelers' checks = $1
million; coin and paper currency = $30 million; repurchase agree¬
ments and Eurodollars = $15 million; demand deposits = $25 million;
retail money market mutual funds = $60 million; savings accounts at
depository institutions = $40 million; checkable deposits at depository
institutions = $35 million; large-denomination time deposits = $50
million; institutional money market mutual funds = $65 million; and
small-denomination time deposits = $45 million. Using Federal
Reserve definitions, determine the dollar sizes of the following:
a. Ml money supply
b. M2 money supply
c. M3 money supply
To determine the dollar sizes of the M1, M2, and M3 money supplies, we need to understand the components included in each category. The Federal Reserve provides specific definitions for each measure. Let's break it down step by step:
a. M1 Money Supply:
M1 represents the narrowest definition of the money supply. It includes highly liquid, easily spendable assets. To calculate M1, we need to sum the following components:
- Coin and paper currency ($30 million): This includes physical money in the form of coins and bills circulating in the economy.
- Travelers' checks ($1 million): These are checks that can be used as a form of payment and are considered equivalent to currency.
Therefore, the dollar size of the M1 money supply would be $1 million (travelers' checks) + $30 million (coin and paper currency) = $31 million.
b. M2 Money Supply:
M2 represents a broader definition of the money supply than M1. It includes everything in M1, plus additional assets that are slightly less liquid but still widely used as a medium of exchange and store of value. To calculate M2, we need to add the following components to M1:
- Savings accounts at depository institutions ($40 million): These are deposits placed with banks or other depository institutions that earn interest and are less readily accessible than demand deposits.
- Retail money market mutual funds ($60 million): These are funds made up of short-term, low-risk investments, such as Treasury bills, and are typically offered by banks and other financial institutions to retail investors.
Therefore, the dollar size of the M2 money supply would be:
$31 million (M1) + $40 million (savings accounts) + $60 million (retail money market mutual funds) = $131 million.
c. M3 Money Supply:
M3 represents the broadest definition of the money supply. It includes everything in M2, plus additional assets that are even less liquid but still considered part of the money supply. To calculate M3, we need to add the following components to M2:
- Institutional money market mutual funds ($65 million): These are funds offered to institutional investors, such as corporations, pension funds, and government entities.
- Large-denomination time deposits ($50 million): These are deposits that cannot be withdrawn before a specified maturity date without incurring a penalty and typically require a larger minimum deposit than other time deposits.
- Repurchase agreements and Eurodollars ($15 million): These represent short-term borrowing arrangements and foreign currency deposits held by U.S. banks and other financial institutions.
Therefore, the dollar size of the M3 money supply would be:
$131 million (M2) + $65 million (institutional money market mutual funds) + $50 million (large-denomination time deposits) + $15 million (repurchase agreements and Eurodollars) = $261 million.
So, to summarize:
a. M1 money supply = $31 million.
b. M2 money supply = $131 million.
c. M3 money supply = $261 million.