D. Currency is coins and paper bills (Federal Reserve Notes) held by people and nonbank
1. If you look at the total for currency (almost $1.2 trillion) and divide it by the American
population (about 300 million, rounding down), that amounts to about $4,000 per
person (and even more per adult).
E. “Total reserves” held by banks at the Fed is the means of payment you probably don’t
have personal experience with, but total reserves play a very important role in the
ﬁnancial system. All major banks have accounts at the Federal Reserve System—
accounts that they use for trading with other major banks and for dealings with the Fed
itself. It’s not currency in these accounts but electronic claims that can be converted into
currency if the bank wishes.
F. Checkable deposits are just like they sound, namely deposits that you can write checks
on or can access with a debit card. These are the sorts of deposits we use most often in
making daily transactions. Often these are also called demand deposits because you
can access this money “on demand.”
G. The largest means of payment are savings accounts, money market mutual funds, and
small-time deposits (also called certiﬁcates of deposit or CDs). Each of these
components can be used to pay for goods and services, but typically with a little bit of
extra work or trouble. Payments from a savings account can be made, for example, by
ﬁrst transferring the money to a checkable account. A money market mutual fund is a
mutual fund invested in relatively safe short-term debt and government securities.
Money market mutual funds typically allow you to write some number of checks per year
or you can always sell part of your fund and transfer the money to a checkable account.
Small-time deposits cannot be withdrawn without penalty before a certain time period
has elapsed, usually six months or a year.
H. liquid asset an asset that can be used for payments or, quickly and without loss of
value, be converted into an asset that can be used for payments
1. Currency is usually the most liquid asset since currency can be spent almost
2. Checkable deposits and reserves are also very liquid, since they can also be spent
easily and they can be turned into currency without loss.
3. Money market mutual funds and time deposits are less liquid since sometimes it
takes time and a little bit of trouble to turn these assets into currency or checkable
deposits. It’s possible to use even less liquid assets as a means of payment (we will
take your house in return for, say, a copy of this textbook), but it is inconvenient.
I. Economists have created many deﬁnitions of the money supply. The three most
1. The monetary base (MB): Currency and total reserves held at the Fed
2. Ml: Currency plus checkable deposits
3. M2: Ml plus savings deposits, money market mutual funds, and small time deposits