Money supply M1
2. (a) Explain the effects of the following TWO items on the money supply M1.
(i) More and more people use credit for payment, whereas fewer people use cash to settle bills.
(ii) Since banks offer high interest return to customers of demand deposits, more and more people transfer their depostis from savings accounts to current accounts.
- wilson625_hkLv 51 十年前最愛解答
Money supply definition :
M1 : The sum of legal tender notes and coins held by the public + customers' demand deposits placed with banks.
M2 : M1 + customers' savings and time deposits with banks + negotiable certificates of deposit (NCDs) issued by banks held outside the banking sector.
M3 : M2 + customers' deposits with restricted licence banks and deposit-taking companies + NCDs issued by these institutions held outside the banking sector.
(i) Because people are not willing to hold and use cash, M1 will DECREASE. Answer this question technique : you should point out M1 definition and stress pulic held less cash - both notes and coins.
(ii) Because the high interest rate in demand deposits will attract more money transfer from other kinds of deposit to demand deposit, M1 will INCREASE. Answer this question technique : M1 and M2 definition, and stress the money will transfer from M2 (deposits in licence bank) to M1 demand deposit.
If you can do it, you can get full mark.
- 1 十年前
i)people hold less money before,because they use credit for payment,as we know m1=currency+ DEMAND DEPOSIT
so m1 decreases
ii)there is a high interest for deposit in demand deposit ,the demand deposit increases and cause m1 increases
- 1 十年前
(i) Decrease in M1 Supply as credit cards belong to Saving Deposit(M2) and Cash belong to M1.
(2)Increase in M1 Supply because Demand Deposit(M1) increases M1 Supply and Saving Deposit decrease M2 Supply.