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    Relative Composition of M1

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    Go to the St. Louis Fed website, (http://research.stlouisfed.org/fred2/categories/25), scroll down and select Money Stock (M1NS). Report the Monthly "Not Seasonally Adjusted" data for the most recent month and for January, 1965 (click on View Data on the left side of the page) for each of the following: Ml Money Stock, the Currency Component of M1, Demand Deposits at Commercial Banks, Other Checkable Deposits, and Traveler's Checks Outstanding.

    How has the relative composition of M1 changed since 1965? Do your best to explain why this change has occurred.

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    Solution Preview

    I'm going to try to keep this as simple as possible.
    I will give you the figures, and then, after, some general observations about the development of M1 measures.
    The rest is up to you.

    Here are the basic terms:

    M1 money stock: all actual money in the system at any given time. M1 does not include bank reserves, but deals entirely with the most "liquid" of cash - actual cash or assets that can be quickly liquidated.
    January 1965: 160.7 billion October 2012: 2.4 trillion

    The simple concept here is that as the US economy grew rapidly, money needed to be put into circulation.

    Currency component: that money which is not included in bank deposits, the Fed or the Department of the Treasury. Money in actual circulation.
    January 1965: 34 billion October 2012, just over $1 trillion

    If rates are generally low and consumption is encouraged, then this will grow massively. You can see here that it is a huge amount of growth, based probably around the idea that rates have been fairly stable for the most part since 1965, with a blip in the 1970s. This measure is the money in our pockets -- money for the public at large. It is the most fluid and liquid of all measures. It's all about consumption and hence, its huge growth makes sense.

    Demand deposits: Accounts at commercial banks that can be accessed by writing out a check. This normally refers only to checking ...

    Solution Summary

    The solution explains the basic terms needed to understand the question and shows how to interpret the data.