Checkable deposits are a type of deposit account held at a financial institution, such as a bank, that allows the account holder to withdraw funds by writing a check or using a debit card. These deposits are considered part of the money supply and are a key component in measuring the money supply through metrics like M1 and M2.
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Checkable deposits are highly liquid and can be easily accessed, making them an important component of the narrow money supply measure, M1.
The inclusion of checkable deposits in M1 reflects their role as a medium of exchange, as they can be used directly to purchase goods and services.
Checkable deposits are distinct from non-checkable deposits, such as savings accounts, which are included in the broader money supply measure, M2.
The growth or decline in checkable deposits can have significant implications for the overall money supply and the conduct of monetary policy by central banks.
Checkable deposits are subject to reserve requirements, which means that banks must hold a certain amount of cash reserves to cover a portion of these deposits.
Review Questions
Explain the role of checkable deposits in the measurement of the money supply through the M1 and M2 metrics.
Checkable deposits are a key component of the M1 money supply measure, as they are highly liquid and can be directly used to purchase goods and services. They are included in M1 because of their function as a medium of exchange. The broader M2 measure also includes checkable deposits, along with other types of deposits and financial assets, providing a more comprehensive view of the total money supply in the economy.
Describe how changes in the level of checkable deposits can impact monetary policy decisions made by central banks.
Fluctuations in the level of checkable deposits can have significant implications for the overall money supply and the conduct of monetary policy. Central banks closely monitor changes in checkable deposits, as an increase in these highly liquid assets can signal a potential expansion of the money supply, which may lead to inflationary pressures. Conversely, a decline in checkable deposits could indicate a contraction in the money supply, potentially prompting central banks to adjust their monetary policy tools, such as interest rates or reserve requirements, to maintain economic stability.
Analyze the relationship between checkable deposits, reserve requirements, and the ability of banks to create new money through the fractional reserve banking system.
Checkable deposits are subject to reserve requirements, which means that banks must hold a certain amount of cash reserves to cover a portion of these deposits. This fractional reserve banking system allows banks to create new money by lending out a portion of their checkable deposits, while still maintaining the required reserves. The level of reserve requirements set by central banks can influence the ability of banks to expand the money supply by creating new loans from checkable deposits. Changes in reserve requirements or the level of checkable deposits can, therefore, have significant implications for the overall money creation process and the effectiveness of monetary policy.
A broader measure of the money supply that includes M1 as well as savings deposits, small-denomination time deposits, and balances in retail money market mutual funds.