Understanding Checking Account Balances and Cash Percentages in

Assignment 7 Q1: Why are checking account balances, but not credit cards, regarded as "money"? A:The best way I can illustrate this concept is through an analogy of sorts. Balances are held in checking accounts the same way cash is held in a wallet. Purchases can be made using the balance on your account, but the account itself isn't money. If your account does not have a positive balance, you can't make any purchases the same way an empty wallet won't pay for your groceries. For this reason, checking account balances are regarded as money, because they are cash/checks that have been counted and held in your account. Credit cards, however, are not regarded as money because they entail borrowing credit that you must pay back later. The amount you spent on your credit card is not your own money, it is a debt balance that you must pay using cash or check. Simply put credit card balances are just a bill that you have to pay using money, but they are not money themselves. Q2: What percent does cash account for in: a) M1? b) M2? A:In order to find the percentage of cash in both the M1 and M2 we must do some simple math. Firstly, figure 13.1 shows that the M1 is worth $5,329 billion. Cash in the M1 accounts for $1,884 billion of that so we need to divide the total value of cash in the M1 by the total value of the M1. The math, in billions, would be: 1,884/ 5,329= 0.35354*100= 35.35354%. This number can be rounded to 35.35% or simply 35%. You do the same thing for the M2, just with a different denominator because the amount of cash in circulation is the same but the total for the M2 is $18,327 billion. The math would be: 1,884/18,327= 0.102799*100= 10.27991%. We can round this number to 10.28% or simply 10%. As we can see, the M1 has a greater percentage of cash because the M2 includes more sources of money than the M1.