Question

State the immediate effect of each of the following actions on M₁ and M₂:

Instructions: If there is no change in M₁ or M₂, enter zero as your response.

a. Barry writes his plumber a check for $200. The plumber takes the check to the bank, keeps $50 in cash, and deposits the remainder in his savings account.

    M_1: by $ .

    M_2: by $ .


b. Maureen deposits the $1,000 from her CD in a money market mutual fund.

    M_1: by $ .

    M_2: by $ .


c. Sylvia withdraws $50 in cash from her savings account.

    M₁: by $ .

    M_2: by $ .

Answer 1

Answer
a. Barry writes his plumber a check for $200. The plumber takes the check to the bank, keeps $50 in cash, and deposits the remainder in his savings account.

The amount is in the M1 and M2 both but after the transaction, it decreases from M1 as saving account is not part of M1

M1: decreases by $150.

M2: does not change by $0.

b. Maureen deposits the $1,000 from her CD in a money market mutual fund.
CD and market mutual fund are part of M2 and does not change M2. Both are not part of M1 so does not change M1

M1: does not change by $ 0.

M2: does not change by $0.

c. Sylvia withdraws $50 in cash from her savings account.
Cash is part of M1 but not saving accounts so M1 increases. Saving account and cash both part of M2 so M2 does not change

M1 rises by $50.

M2 does not change by $0