M1 5 currency (in circulation) 1 checkable deposits. The largest component of M1 is checkable deposits. If the face value of a coin were not greater than its intrinsic (metallic) value people would remove coins from circulation and sell them for their metallic content. M2 =M1 + noncheckable savings deposits + money market deposit accounts + small time deposits + money market mutual fund balances. M3 = M2 + large time deposits (those of $100 000 or more). Near-monies include the components of M2 and M3 not included in M1 and secondly other less liquid assets such as Savings bonds and Treasury bills.

Near-monies represent wealth; the more wealth people have the more they are likely to spend out of current income. Also the fact that near-monies are liquid adds to potential economic instability. People may cash in their near-monies and spend the proceeds while the monetary authorities are trying to stem inflation by reducing the money supply. Finally near-monies can complicate monetary policy because M1 M2 and M3 do not always change in the same direction.

The argument for including noncheckable savings deposits in a definition of money is that saving deposits can quickly be transferred to a checking account or withdrawn as cash and spent.

In the first case the value of the dollar in year 2 relative to year 1 is $.80 (= 1/1.25); in the second case the value is $2 (= 1/.50). Generalization: The price level and the value of the dollar are inversely related.

(a) The level of nominal GDP. The higher this level the greater the amount of money demanded for transactions. (b) The interest rate. The higher the interest rate the smaller the amount of money demanded as an asset.

On a graph measuring the interest rate vertically and the amount of money demanded horizontally the two demand for money curves can be summed horizontally to get the total demand for money. This total demand shows the total amount of money demanded at each interest rate. The equilibrium interest rate is determined at the intersection of the total demand for money curve and the supply of money curve.

(a) Expanded use of credit cards: transaction demand for money declines; total demand for money declines; interest rate falls. (b) Shortening of worker pay periods: transaction demand for money declines; total demand for money declines; interest rate falls. (c) Increase in nominal GDP: transaction demand for money increases; total demand for money increases; interest rate rises.