I red that monetary base includes Cash/coins + Bank reserves. If I move money from checking account to money market account, does it cause decrease in monetary base? Do banks need to maintain reserves on only checking account but not on money market account?
chinni, there’s two classifications of money supply, M1 and M2. M1 = currency in circulation (i.e. coins & paper) + checkable deposits + travelers’ checks M2 = M1 + savings deposits + time deposits less than $100k + money market mutual fund shares So the transfer you described from checking to money market will reduce M1, but have no impact on M2. Your book should discuss some of the problems in measuring money supply, including widespread use of USD abroad and the impact of electronic money, among other things. To your second question, I had to look this up to remember, it seems reserves are measured as vault cash + deposits of the bank held at the Fed So the required reserve ratio would apply to that balance. Hopefully others will clarify and/or elaborate, thanks.
hiredguns1 Wrote: ------------------------------------------------------- > chinni, there’s two classifications of money > supply, M1 and M2. > > M1 = currency in circulation (i.e. coins & paper) > + checkable deposits + travelers’ checks > M2 = M1 + savings deposits + time deposits less > than $100k + money market mutual fund shares > > So the transfer you described from checking to > money market will reduce M1, but have no impact on > M2. > > Your book should discuss some of the problems in > measuring money supply, including widespread use > of USD abroad and the impact of electronic money, > among other things. > Good stuff > To your second question, I had to look this up to > remember, it seems reserves are measured as > vault cash + deposits of the bank held at the Fed > So the required reserve ratio would apply to that > balance. > Right, but I think the question was do the banks need to keep reserves on MMDA accounts and the answer is that they do. For years, I thought that a money market account at a bank was just a convenient money market fund. It’s not. Money invested in MMDA’s is used just like any other money at the bank - going to car loans and real estate loans and not into the money market. Thus, the reserve requirement applies to it just like anything else. Now if you walk into a Wachovia bank and they sell you an Evergreen money market mutual fund, that is not an MMDA deposit. > Hopefully others will clarify and/or elaborate, > thanks. Edit: And the other point that I was going to make was that hiredguns description of M2 is right of course, but the MMDA deposit is part of " savings deposits" not “money market mutual fund shares”