AP Macroeconomics Question 249: Answer and Explanation

Test Information

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Question: 249

4. Currency held by the public

  • A. is not part of the money supply, but currency held by banks is.
  • B. is part of M 1 but not M2.
  • C. is part of the money supply, but currency held by banks is not.
  • D. and by banks is part of the money supply.
  • E. or banks is not part of the money supply since it is not included in M I.

Correct Answer: C

Explanation:

(C) Currency in the vaults of depository institutions is not counted as part of the money supply. However, if you withdraw $100 from your checking account, M 1 is unaffected. When the money comes out of the bank's vault and goes into your pocket, that in itself raises the money supply by $100-but your checking account went down by $100 because of the withdrawal. It's a wash.