4. The components of the M1 money supply are the coins, bills and checkable deposits. The largest component of the M1 money supply is the checkable deposits and the bills are called legal tender. The face value of a coin must be worth more than the intrinsic value of the coin (the value of the metal) because if it is not, then rational people would simply melt down the coins and sell them for the value of the metal. The near monies that are included in the M2 money supply are the savings deposits, small time deposits and the money market mutual funds. The difference between the M2 and M3 money definitions are that the M3 near monies are greater in value, such as the M3 definition includes large time deposits (100,000 dollars or greater) while the M2 includes only small time deposits (below 100,000 dollars).
6. If the price level increases by 1.25 then the new value of the dollar is 0.8 of what it was in year 1. If the price level decreases to 0.5, then the new value of the dollar has doubled from year 1. We can therefore conclude that the dollar and the price level are inversely related.
7. The main determinant for transactions demand is the level of the nominal GDP and the main determinant of asset demand is the interest rate. When asset demand is added horizontally to transaction demand and the equlibrium interest rate is determined by the intersection point of the supply of money and total demand for money. An increase in the use of credit cards will shift the total demand of money outwards because with the increased use of credit cards, an increase in the asset demand will occur. A shortening of worker pay periods will also decrease the total demand of money because the number of times the dollars are spent per year will increase. This increase will change the transaction curve because the curve is determined by the nominal GDP / the number of times a dollar is spent in a year, therefore an increase in the dollars spent will decrease the transaction curve, which will decrease the total money demand curve. An increase in nominal GDP would shift the total money demand supply outwards because as nominal GDP increases so does the transactions demand.
