Question

Explain what impact each of the following actions has on both M1 and M2. (a) Mary...

Explain what impact each of the following actions has on both M1 and M2.

(a) Mary deposits $300 in cash into her Savings Account.

(b) Sam transfers $400 from his Savings Account into his Checking Account.

(c) Chen takes $60 out of his Checking Account and buys a new pair of shoes.

(d) Pak borrows $1,000 in cash from his bank in order to buy a new computer for his business.

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Answer #1

Cash is a part of currency and M1 as well as M2. Saving account is a part of M2 only. This transaction will reduce M1 but will not change M2 which experiences a decline as well as an increase of $300.

a transfer of $400 from savings account to checking account will increase M1 but will not change M2 because $400 will be decreased from M2 and then later on added to M2.

$60 will be subtracted from both M1 and M2.

Increase in the loan amount of $1,000 will increase both M1 and M2.

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