Sample by My Essay Writer
M2 velocity related to a category in the money supply that includes the M1 and all of the time-related savings deposits, deposits and non-institutional money market funds. The M2 is a much wider classification of money than the M1 is. Many economists use the M2 velocity when they are looking to quantify how much money is in circulation to explain the various economic conditions related to money.
The M2 Velocity isn’t stable and it is correlated with the employment-population ratio, which is an indicator of the nations’ economic vitality. The M2 velocity as well as the employment-population ratio declines during recessions.
a. Explain why M2 velocity should be more predictable than M1 velocity.
M2 velocity is more predictable than M1 velocity, because M2 is hinged on the employment-population ratio, which is usually relatively stable. It never really experiences significant fluctuations, but can gradually increase or decrease over time. However, M1 also does not include the time-related savings deposits, deposits and non-institutional money market funds, which means there is less grounding for the M1 velocity and it makes it more open to massive fluctuations.
b. What is the problem referred to at the very end of the first sentence, and exactly how does M2 solve this problem?
The sentence is referring to the fact that there is an issue with accurate readings of the monetary situation because there is a lot of instability. However, M2 solves that instability by having many factors that are taken into consideration when making an estimate on the current monetary situation. It is a more macro approach that factors in components that are necessary for an accurate monetary assessment.