Money Stock Measures In This Module 4 Web Assignment

Money Stock Measuresin This Module 4 Web Assignment You Will Be Evalu

In this assignment, you will evaluate data on Money Stock Measures at FRED (Federal Reserve Economic Data). First, describe the components that make up M1, M2, and MZM in a paragraph or two. Then, visit the Federal Reserve Bank of Saint Louis website and select the data series for the components listed, using the Monthly, Seasonally Adjusted data for the past 30 years (1985 to 2015). You may analyze different time frames such as one year, five years, or ten years to observe trends. Focus on the following components:

  • M1 Money Stock
  • Currency
  • Total Checkable Deposits
  • Demand Deposits at Commercial Banks
  • Travelers Checks Outstanding

Next, write two to three paragraphs explaining the patterns and trends observed in the data for each component. Discuss when clear changes occurred and hypothesize about possible underlying causes, including economic events. Consider whether shifts between different aggregates occurred over time, illustrating changes in public preferences or banking behaviors.

Paper For Above instruction

The components constituting the money supply are fundamental indicators of the economy's liquidity, reflecting the public's ability to access and utilize monetary resources. M1, the narrowest measure, includes the most liquid assets such as currency in circulation, demand deposits, and traveler's checks. Demand deposits are funds held in checking accounts at commercial banks that can be quickly accessed for transactions. Traveler’s checks, though less used today, represented a form of pre-paid travel currency. M2 expands on M1 by adding savings deposits, small-denomination time deposits, and retail money market funds, offering a broader view of the money supply that includes assets less immediately accessible for transaction purposes. The collection of assets within M2 captures the savings behavior and investment patterns of the economy. MZM (Money Zero Maturity) includes all holdings that are liquid and available for transaction without any maturity restrictions, encompassing M1 and other liquid assets such as retail money market funds, providing a measure that reflects the most readily accessible form of money.

Analyzing the data from the Federal Reserve’s FRED database for the period of 1985 to 2015 reveals distinct patterns and trends in each component of the money supply. Currency in circulation generally demonstrates steady growth over the period, with noticeable accelerations during economic uncertainties or periods of high inflation. For instance, during the late 1980s and early 2000s, currency growth rates spiked, possibly due to distrust in banking systems, inflation fears, or increased cash demand for transactions. Total checkable deposits, including demand deposits at commercial banks, also exhibit growth but are more sensitive to banking policies and interest rate changes. During the 2008 financial crisis, a significant shift is observable: demand deposits declined slightly as consumers and businesses hoarded cash or moved to safer assets, while savings deposits and money market funds saw increased inflow, reflecting a flight to safety and liquidity.

Demand deposits at commercial banks consistently appear correlated with economic activity. During periods of economic expansion, demand deposits increase as businesses and households increase their transactional balances. Conversely, during recessionary periods, demand deposits tend to decline as spending slows and savings rise. Travelers checks, on the other hand, have experienced a steady decline over these decades, consistent with technological advancements and the decline in traveler's checks’ use in favor of electronic payments and credit/debit cards.

Overall, the patterns observed in the data are influenced by macroeconomic events such as inflation, technological innovation, banking regulations, and financial crises. Notably, the 2008 financial crisis and subsequent recession prompted shifts in the composition of the money supply, with a notable increase in liquid assets like savings deposits and money market funds. Such shifts reflect changes in public confidence, risk perception, and the monetary policy responses by the Federal Reserve, including interest rate adjustments and unconventional monetary policies like quantitative easing. The transitions between monetary aggregates indicate an evolving landscape of liquidity preferences driven by both macroeconomic conditions and structural changes in financial markets.

References

  • Board of Governors of the Federal Reserve System. (2023). FRED Economic Data. Federal Reserve Bank of St. Louis. https://fred.stlouisfed.org/
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  • Blanchard, O., & Johnson, D. R. (2013). Macroeconomics (6th ed.). Pearson.
  • Bernanke, B. S. (2004). The Great Moderation. Remarks at the Conference to Recognize the 50th Anniversary of the Bretton Woods system, Bretton Woods.
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