Macroeconomics
➔ DemandDeposits:Theseare accountsdepositedincommercialbanksandcanbewithdrawn by their holders on demand without prior notice. Checking accounts , also called checkable deposits, are the most common form of demand deposits. They are demand deposits that accountholderscanaccessanduseforday-to-daytransactions,suchaswritingchecksorusing debit cards. Note that the government’s demanddepositsheldwithcommercialbanksare excluded from money supply . ➔ Other Liquid Deposits and Saving Deposits (Including Money Market Deposit Accounts): This component consists of personal savings deposits held at chartered banks . These accounts typically offer some interest on deposits but are still considered highly liquid, allowing individuals to access their savings relatively easily. Money market deposit accounts are accounts that pay a higher interest than saving accounts while enjoying the benefts of checking and saving accounts sincetheyallowtheirholderssomeabilitytowritechecksand withdraw money (e.g., allow only afewcheckspermonthbutpaymarket-determinedinterest rates). M1=currencyincirculation+demanddeposits+otherliquiddepositsandsavingdeposits (including money market deposit accounts) 2. M2 (Broad Money): M2 is abroadermeasureofthemoneysupplythatencompassesnotonly the components of M1, but also additional assets that are relatively liquid. However, M2 componentsarelessliquidthanM1 componentssincetheyrequiremoretimetobeconverted intocash.ThisiswhyM2issometimescalled“nearmoney”becauseitisnearlyasliquidasM1, but not quite. M2 includes the following components: ➔ M1 Components: M2 includes all the components of M1, which are currency in circulation, demand deposits, and other liquid deposits and saving deposits (including money market deposit accounts). ➔ Small-Denomination Time Deposits: They are also known as time deposits (Certifcates of Deposits - CDs). These are interest-bearing accounts with a value less than $100,000 and fxed maturity dates . They can be converted to cash before maturity but usually come with penalties for early withdrawal. ➔ Money Market Mutual Funds: These are investment vehicles that pool money from multiple investors to invest in safe, short-term, and low-risk assets and securities (i.e., they sell shares and use the proceeds to purchase short-term securities). They can be used to write checks and make purchases, although only cover a certain amount . M2 = M1 + small-denomination time deposits + money market mutual funds Key Differences ● M1representsthemostliquidformsofmoney,whereasM2includesadditionalassetsthatare still relatively liquid but may have certain restrictions or conditions on access or withdrawal.
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