In the 1990s Automatic Teller Machines (ATMs) were invented. This financial inno
ID: 1226305 • Letter: I
Question
In the 1990s Automatic Teller Machines (ATMs) were invented. This financial innovation allowed people to withdraw funds from their bank deposits at any time of the day beyond normal banking hours, and from machines that aren’t located on the bank property. It led to people transferring significant amounts of funds from their (Retail) Money Market Mutual Funds into checkable deposits such as Demand Deposits and NOW Accounts.
(a) How does M1 change as a result? How does M2 change as a result?
(b) Name and define another type of bank deposit which does not provide checking services at all. Briefly explain why consumers still might desire holding this asset, despite the existence of interest bearing checking accounts.
(c) Suppose that a customer uses an ATM to make a $100 withdrawal from their checkable deposits. Show this move on the bank’s balance sheet
(d) Many economists are not satisfied with M2, because it includes small time deposits. Provide a definition for an alternative money measure to M2 which does not contain this asset. What fundamental role for money (e.g. medium of exchange, standard of value, etc.) does this argument pertain to?
(e) Money Market Deposit Accounts (MMDAs) were allowed in the mid-1980s to help banks counter disintermediation due customers turning to Retail Money Market Mutual Funds (MMMFs). Defining disintermediation and Retail MMMFs, briefly explain how the invention of MMDAs in the early 1980s tried to address this problem.
Explanation / Answer
a) The money market mutual funds in part of M2 and not of M1 so if money is transfered from money market mutual funds to demand deposits and NOW accounts then M1 will increase and M2 will remain same as M2 includes M1.
b) Online banking is also a type of service which does not requires any visit to bank for banking services. People like to hold some money because of emergency cash requirements, banking services not available is very remote locations.
c)
Assets Liability Reserves -$100 Demand Deposits - -$100 Loans and Securities - No change Borrowings - Nochange Other asset - No Change Capital - No change Total - -$100 Total - -$100