1.
Distinguishing Between M0, M1, and M2
A country's central bank provides the following data (in billion USD):
Currency in circulation: 300
Vault cash (held by banks): 50
Demand deposits: 450
Traveler’s checks: 10
Other checkable deposits: 90
Savings deposits: 400
Small time deposits: 100
Money market mutual funds: 150
a) Calculate the values of M0, M1, and M2.
b) Explain the difference between these aggregates and why each is important for
monetary policy.
2. Assume that:
Total currency in the economy = $200 billion
Demand deposits = $300 billion
Savings deposits = $400 billion
Suppose that households decide to withdraw $50 billion from their savings accounts and move it
into demand deposits.
a) What is the initial value of M1 and M2?
b) What is the new value of M1 and M2 after the shift?
c) Has the money supply increased? Explain why or why not.
3. A bank receives a new deposit of $5,000. The required reserve ratio is 20%.
Assume banks lend out all excess reserves, and there is no cash leakage or currency held by the
public.
a) Calculate the total potential increase in the money supply.
b) Explain what would happen to the total money supply if the reserve ratio increased to
25%.
4. The central bank sets the reserve requirement at 10%. A bank currently holds $1,000,000 in
deposits and keeps $150,000 as reserves.
a) What is the bank's reserve ratio?
b) Is the bank holding excess reserves? If so, how much?
c) If the bank lends out all of its excess reserves, how much can the total money supply
increase (assum`e no leakages and public holds no cash)?
SOLVE:
1. Here's a detailed solution to your macroeconomics question:
a) Calculating M0, M1, and M2
Given Data (in billion USD):
Currency in circulation = 300
Vault cash (held by banks) = 50
Demand deposits = 450
Traveler’s checks = 10
Other checkable deposits = 90
Savings deposits = 400
Small time deposits = 100
Money market mutual funds = 150
M0 (Monetary Base or Base Money)
M0 = Currency in circulation + Vault cash
M0=300+50=350 billion USDM0 = 300 + 50 = \boxed{350\ \text{billion USD}}
M1 (Most liquid form of money)
M1 = Currency in circulation + Demand deposits + Traveler’s checks + Other checkable deposits
M1=300+450+10+90=850 billion USDM1 = 300 + 450 + 10 + 90 = \boxed{850\ \text{billion
USD}}
M2 (Includes M1 + less liquid savings)
M2 = M1 + Savings deposits + Small time deposits + Retail money market mutual funds
M2=850+400+100+150=1,500 billion USDM2 = 850 + 400 + 100 + 150 = \boxed{1,500\ \
text{billion USD}}
b) Explanation of Differences and Importance
Aggregate What It Includes Liquidity Importance for Policy
M0 Controlled directly by central bank
Physical currency (in public Very high
(Monetary (e.g., via open market operations);
+ in banks) (currency)
Base) forms the base for bank lending.
M0 (excluding vault cash) + Measures money readily available for
demand deposits + Highest spending; useful for understanding
M1
traveler’s checks + liquidity short-term spending and inflation
checkable deposits pressure.
Captures broader money supply;
M1 + savings deposits +
Moderately important for medium-term inflation,
M2 small time deposits +
liquid interest rate setting, and economic
MMMFs
growth targeting.
Summary
M0 (350) → the most narrow measure, showing currency in the system.
M1 (850) → adds very liquid bank account balances to M0.
M2 (1,500) → adds less liquid savings and investment-type accounts.
Each broader aggregate reflects how much purchasing power is readily or potentially available,
making them essential for tailoring monetary policy to either control inflation (tight policy) or
stimulate growth (loose policy).
Let bà biết nếu m cần thêm bảng tóm tắt hay hình minh họa nha!
