Answer to Question #284912 in Economics for Bea

Question

•         explain the difference between M1, M2 and M3

•         differentiate between money, income and wealth

•         explain why credit cards are not seen as money

•         explain the basic function of a financial intermediary

•         explain a demand determined money supply

Answer 1

• M1, M2 and M3 are measurements of the United States money supply, known as the money aggregates. M1 includes money in circulation plus checkable deposits in banks. M2 includes M1 plus savings deposits (less than $100,000) and money market mutual funds. M3 includes M2 plus large time deposits in banks.
• Wealth refers to the stock of assets held by a person or household at a single point in time. These assets may include financial holdings and saving, but commonly also include the family home. Income refers to money received by a person or household over some period of time.
• A credit card is not money. For a fee that each subscribing merchant agrees to pay, the bank issues the credit card, makes a loan to the buyer, and pays the merchant promptly. The buyer then has a debt that he or she settles by making payment to the credit card company.
• Financial intermediaries serve as middlemen for financial transactions, generally between banks or funds. These intermediaries help create efficient markets and lower the cost of doing business.
• While the demand of money involves the desired holding of financial assets, the money supply is the total amount of monetary assets available in an economy at a specific time.