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💸principles of economics review

Money Market Deposit Accounts

Written by the Fiveable Content Team • Last updated August 2025
Written by the Fiveable Content Team • Last updated August 2025

Definition

A money market deposit account (MMDA) is a type of savings account that offers a higher interest rate than a traditional savings account, but with more restrictions on withdrawals and transactions. MMDAs are considered part of the broader M2 money supply measure, which includes various liquid assets that can be easily converted into cash.

Money Market Deposit Accounts cheat sheet for homework

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5 Must Know Facts For Your Next Test

  1. Money market deposit accounts are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per depositor, providing a safe and secure place to store funds.
  2. MMDAs often have higher minimum balance requirements than traditional savings accounts, but this allows them to offer higher interest rates to account holders.
  3. Withdrawals from MMDAs are typically limited to a certain number per month, and there may be penalties for exceeding this limit, helping to maintain the account's liquidity and stability.
  4. The interest rates on MMDAs are variable and can fluctuate based on changes in the broader money market, which is influenced by factors such as the Federal Reserve's monetary policy.
  5. MMDAs are considered part of the M2 money supply measure, which includes a variety of liquid assets that can be easily converted into cash, making them an important component of the overall money supply.

Review Questions

  • Explain how money market deposit accounts (MMDAs) are classified within the M2 money supply measure.
    • Money market deposit accounts (MMDAs) are considered part of the M2 money supply, which is a broader measure of the money supply that includes M1 (currency, coins, and checkable deposits) as well as savings accounts, small time deposits, and retail money market mutual fund shares. MMDAs are included in M2 because they are highly liquid assets that can be easily converted into cash, making them an important component of the overall money supply.
  • Describe the key features of money market deposit accounts that distinguish them from traditional savings accounts.
    • Compared to traditional savings accounts, money market deposit accounts (MMDAs) typically offer higher interest rates, but also have higher minimum balance requirements and more restrictions on withdrawals and transactions. MMDAs are often limited to a certain number of withdrawals per month, and there may be penalties for exceeding this limit. These features help to maintain the liquidity and stability of MMDAs, making them a more attractive option for individuals looking to earn a higher return on their savings while still having easy access to their funds.
  • Analyze the role of money market deposit accounts in the broader context of the Federal Reserve's monetary policy and its impact on the overall money supply.
    • The interest rates on money market deposit accounts (MMDAs) are variable and can fluctuate based on changes in the broader money market, which is influenced by the Federal Reserve's monetary policy. When the Federal Reserve adjusts its target interest rate, it can affect the rates offered on MMDAs, which in turn can influence the demand for these accounts and their overall contribution to the M2 money supply. As highly liquid assets, changes in the size and composition of MMDAs can have implications for the Federal Reserve's ability to control the money supply and achieve its monetary policy objectives, such as maintaining price stability and promoting economic growth.
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