In the United States, the money supply (M1) is comprised of: A. coins, paper currency, checkable deposits and mutual funds. B. coins, currency, checkable deposits, and Series E bonds. C. coins, paper currency, checkable deposits, and traveler’s checks. D. paper currency, coins, checkable deposits, and savings deposits. 17. Paper money (currency) in the United States is issued by the: A. United States Mint. B. Federal Reserve Banks. C. United States Treasury. D. national banks. 18. Assuming no other changes, if checkable deposits decrease by
40 billion, the: A. M1 money supply will decline and M2 money supply will remain unchanged. B. M1 and M2 money supplies will not change. C. M1 money supply will increase and M2 money supply will remain unchanged. D. M1 and M2 money supplies will both decline.
The Correct Answer and Explanation is:
Question 1:
In the United States, the money supply (M1) is comprised of:
✅ C. coins, paper currency, checkable deposits, and traveler’s checks.
Question 2:
Paper money (currency) in the United States is issued by the:
✅ B. Federal Reserve Banks.
Question 3:
Assuming no other changes, if checkable deposits decrease by $40 billion, the:
✅ D. M1 and M2 money supplies will both decline.
Explanation
M1 is the narrowest definition of the money supply in the United States and consists of assets that are highly liquid. Specifically, M1 includes coins and paper currency in circulation (outside of the Federal Reserve and banks), checkable deposits (demand deposits), and traveler’s checks. These are all forms of money that can be used immediately to make purchases. Therefore, the correct answer is C, as mutual funds and savings deposits are not part of M1.
Paper money in the U.S. is issued by the 12 regional Federal Reserve Banks under the oversight of the Federal Reserve System, not by the U.S. Treasury or the U.S. Mint. The U.S. Mint produces coins, while the Treasury oversees broader fiscal operations. Therefore, the correct answer is B — Federal Reserve Banks.
For the third question, if checkable deposits decrease by $40 billion, that represents a decline in a core component of both M1 and M2. Checkable deposits are part of M1, and since M2 includes all of M1 plus additional forms of less liquid savings like savings deposits, money market accounts, and small time deposits, any reduction in M1 automatically reduces M2 by the same amount unless there is an offsetting increase elsewhere (which is not assumed here). So, both M1 and M2 decline, making the correct answer D.
In summary, understanding the composition of M1 and M2 and the issuing authority for currency helps in analyzing how changes in specific money supply components affect the broader economy.
