Question

Suzi uses her debit card drawn on Mid First bank to purchase a sandwich at the MU pod. The funds are transfered from her bank account to the vender's bank account instantly. As a result of this transaction M1 _________ and M2 ________.

Increases/Decreases/Does not change?

Answer 1

The M1 measure of money supply remains does not change and M2 also does not change.

=> The use of a debit card is not a part of any of the components of M2. Thus, M2 remains unchanged.

=> The use of a debit card is part of 'checkable deposits' in the M1 money supply. But the value of M1 changes if a debit card is used to 'demand' money out into the economy for circulation or, in other words, when an amount is withdrawn or deposited. However, in this case, the amount is just getting tranferred from one accoun to the other, that is, there is no change in money supply in circulation. Thus, the value of M1 remains unchanged.