a) i) Jane Doe has the following assets:

$100 in her wallet

$800 in her demand deposit account

$1,000 in her savings account

A $50 travelers check from her last trip to China

A $300 outstanding credit card bill

A car worth $5,000

A house worth $200,000

Identify which of the assets are included in M1, which are in M2, or neither M1 nor M2.

ii) Suppose she takes $400 for her demand deposit account and deposits it in her savings account. What is the change in M1 and M2?

b) Many savers choose to hold their funds at a financial intermediary instead of lending them directly in financial markets. Explain TWO (2) reasons why financial intermediaries and indirect financing are so important in financial markets.