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Say you withdraw $500 in cash from your checking account. As a direct result of this...

Say you withdraw $500 in cash from your checking account. As a direct result of this transaction, a. What has happened to M1? b. What has happened to M2?

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Answer #1

NO,changes will be made to either M1 or M2.

Explanation-

M1=Currency+Demand Deposits+Trvelers's Cheque+Other Chequable Deposits

When $500 is withdrawn currency increases by $500 but at the same time,demand deposits decreases by $500.So,net effect remains same.

M2=M1+Near Money(savings deposits,money market securities,mutual funds and small time deposits)

Since the withdrawa of $500 in cash from your checking account does not affect any items of M2,it remains the same.

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