Question

Suppose Tabatha takes $500 from her savings account and deposits it in her checking account. What...

Suppose Tabatha takes $500 from her savings account and deposits it in her checking account. What is the change in M1 and M2?

a. M1 and M2 both remain unchanged
b. M1 and M2 both increase
c. M1 increases and M2 remains unchanged
d. M1 increases and M2 decreases
e. M2 increases and M1 remains unchanged
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Answer #1

Option C.

  • The M1 and M2 are the two main definitions of money supply.
  • M1 Money supply is said to include highly liquid assets namely the money in circulation, demand or Checkable deposits etc.
  • While the M2 money supply is comparatively less liquid than M1 money supply and it includes M1 plus mutual funds, saving deposits, money market funds etc which are usually termed as near money.
  • Here as Tabatha is taking $500 from her savings account and depositing in her checking account which comes under M1 Money supply, M1 is said to increase while the M2 remains unaffected.
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