Question

JT uses $8,000 from his saving account as the initial deposit on a house. As a result:

Select one:

a. M1 will decrease by $8,000 and M2 remains the same

b. M1 and M2 will both decrease by $8,000

c. M1 and M2 will both increase by $8,000

d. M2 decreases by $8,000 and M1 decreases by $8,000

e. M2 decreases by $8,000 but M1 remains the same.

.

Answer 1

The correct answer is (e) M2 decreases by $8,000 but M1 remains the same.

M1 includes only Cash , checking account and traveler's checks while M2 = M1 + saving account + COD + Mutual funds.

Thus Saving account is a part of M2 only. So changes win saving account will not effect M1.

Here Saving account amount is used for a deposit of house. Thus this will result in decrease in M2 because amount in saving accounts has decreased and that amount has Not used in for any of the purpose but for the deposit of House. As Saving account does not have any ole in M1 and thus will not effect M1. Hence, M2 will decrease by $8000 and M1 remains same.

Hence, the correct answer is (e) M2 decreases by $8,000 but M1 remains the same.