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Suppose your bank reduces the interest rate on your savings account. You transfer $200 from your...

Suppose your bank reduces the interest rate on your savings account. You transfer $200 from your savings account to your checking account. What is the overall effect on M1 and M2?

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Answer #1

M1 will increase by $200 and M2 remains the same

The US Federal Reserve classifies the money supply of the country into four categories depending on the liquidity of each category. Liquidity refers to how easily it is possible to turn investments in each segment to currency. This supply of money includes all of the currency and liquid instruments, including gold, coins and bank deposits, that circulate in the economy. The M1 and M2 money supplies are impacted by the transfer of money from your savings account to your checking account.

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