Chapter 3
ANSWERS TO QUESTIONS
1. Why is simply counting currency an inadequate measure of money?
2. In prison, cigarettes are sometimes used among inmates as a form of payment. How is it possible for cigarettes to solve the "double coincidence of wants" problem, even if a prisoner does not smoke?
3. Three goods are produced in an economy by three individuals:
Good Producer
Apples Orchard Owner
Bananas Banana Grower Chocolate Chocolatier
If the orchard owner likes only bananas, the banana grower likes only chocolate, and the chocolatier likes only apples, will any trade between these three persons take place in a barter economy? How will introducing money into the economy benefit these three producers?
4. Why did cavemen not need money?
5. Most of the time it is quite difficult to separate the three functions of money. Money performs its three functions at all times, but sometimes we can stress one in particular. For each of the following situations, identify which function of money is emphasized.
a. Brooke accepts money in exchange for performing her daily tasks at her office, since she knows she can use that money to buy goods and services.
b. Tim wants to calculate the relative value of oranges and apples, and therefore checks the price per pound of each of these goods as quoted in currency units.
c. Maria is currently pregnant. She expects her expenditures to increase in the future and decides to increase the balance in her savings account.
10. In ancient Greece, why was gold a more likely candidate for use as money than wine?
11. If you use an online payment system such as PayPal to purchase goods or services on the Internet, does this affect the M1 money supply, the M2 money supply, both, or neither? Explain.
12. Rank the following assets from most liquid to least liquid:
a. Checking account deposits
b. Houses
c. Currency
d. Automobiles
e. Savings deposits
f. Common stock
16. Assume that you are interested in earning some return on the idle balances you usually keep in your checking account and decide to buy some money market mutual funds shares by writing a check. Comment on the effect of your action (with everything else the same) on M1 and M2.
17. In April 2009, the growth rate of M1 fell to 6.1%, while the growth rate of M2 rose to 10.3%. In September 2013, the year-over-year growth rate of the M1 money supply was 6.5%, while the growth rate of the M2 money supply was about 8.3%. How should Federal Reserve policymakers interpret these changes in the growth rates of M1 and M2?
18. Suppose a researcher discovers that a measure of the total amount of debt in the U.S. economy over the past twenty years was a better predictor of inflation and the business cycle than M1 or M2. Does this discovery mean that we should define money as equal to the total amount of debt in the economy?
ANSWERS TO DATA ANALYSIS PROBLEMS
1. Go to the St. Louis Federal Reserve FRED database, and find data on currency (CURRSL), traveler's checks (TVCKSSL), demand deposits (DEMDEPSL), and other checkable deposits (OCDSL). Calculate the M1 money supply, and calculate the percentage change in M1 and in each of the four components of M1 from the most recent month of data available to the same time one year prior. Which component has the highest growth rate? The lowest growth rate? Repeat the calculations using the data from January 2000 to the most recent month of data available, and compare your results.
See tables below, showing calculations from the April 2014 benchmark period. Over the one- year period from April 2013 to 2014, demand deposits grew the fastest at 15.5%, while traveler's checks grew the least, shrinking by 10.8% over the period. A similar result holds over the longer period from April 2014 to January 2000; use of traveler's checks experienced a substantial decline of 61.2%, while demand deposits increased by 217.2%
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April 2014
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April 2013
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January 2000
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Currency
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$1199.8 Bil.
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$1110.6 Bil.
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$524.9 Bil.
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Traveler's Checks
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$3.3 Bil.
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$3.7 Bil.
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$8.5 Bil.
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Demand Deposits
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$1098.3 Bil.
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$950.8 Bil.
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$346.3 Bil.
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Other Checkable Deposits
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$476.4 Bil.
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$452.8 Bil.
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$242.5 Bil.
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M1
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$2777.8 Bil.
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$2517.9 Bil.
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$1122.2 Bil.
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April 2013 to April 2014
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January 2000 to April 2014
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Currency
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8.0%
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128.6%
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Traveler's Checks
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-10.8%
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-61.2%
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Demand Deposits
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15.5%
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217.2%
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Other Checkable Deposits
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5.2%
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96.5%
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M1
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10.3%
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147.5%
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2. Go to the St. Louis Federal Reserve FRED database, and find data on small-denomination time deposits (STDSL), savings deposits and money market deposit accounts (SAVINGSL), and retail money market funds (RMFSL).
Calculate the percentage change of each of these three components of M2 (not included in M1) from the most recent month of data available to the same time one year prior. Which component has the highest growth rate? The lowest growth rate? Repeat the calculations using the data from January 2000 to the most recent month of data available, and compare your results. Use your answers from question 1 to determine which grew faster: the non-M1 components of M2, or the M1 money supply.
See tables below, showing calculations from the April 2014 benchmark period. Over the one- year period from April 2013 to 2014, savings deposits grew the fastest at 7.0%, while small time deposits grew the least, decreasing by 13.0% over the period. A similar result holds for the period January 2000 to April 2014; savings deposits grew a substantial amount, at 317.5% over the period, while small time deposits decreased significantly, but 45.3%.
Overall, the M1 money supply grew more over the one year period (10.3% versus 4.9%) and the longer period (147.5% versus 139.5%) than the non-M1 components that make up M2, however the non-M1 components of M2 are much larger in size than the M1 components, so will have a larger influence overall on the M2 money supply.
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April 2014
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April 2013
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January 2000
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Small Time Deposits
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$527.4 Bil.
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$606 Bil.
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$963.4 Bil.
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Savings/MMDA
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$7271.4 Bil.
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$6793.4 Bil.
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$1741.5 Bil.
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Retail MMMF
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$638.2 Bil.
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$640.7 Bil.
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$818.4 Bil.
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Non-M1 M2
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$8437 Bil.
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$8040.1 Bil.
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$3523.3 Bil.
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April 2013 to April 2014
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January 2000 to April 2014
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Small Time Deposits
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-13.0%
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-45.3%
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Savings/MMDA
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7.0%
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317.5%
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Retail MMMF
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-0.4%
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-22.0%
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Non-M1 M2
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4.9%
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139.5%
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