Question

If Joe transfers $1,000 from his savings account to his checking account and assuming that banks cannot lend this money, then: Please choose the correct answer from the following choices, and then select the submit answer button. Answer choices
a. M1 will increase by $1,000.
b. M1 will remain the same.
c. M1 will increase by $1,000, and M2 will decrease by $1,000.
d. M2 will increase by $1,000.

Answer 1

Answer:

A

Explanation:

M1 money supply includes coins and bill in circulation, which are most liquid ones: cash, amounts held in the checking accounts and travelers’ checks. M2 money supply includes everything in M1 but it also includes savings deposits in banks, money market securities, mutual funds and other time deposits.  

At the begging Joe had $1,000 in his savings account, which means those $1,000 were included in M2. When he transferred this amount to the checking account, M1 increased by $1,000. M2 will not decrease because this money supply includes everything in M1 plus other types of deposits.  

Answer 2

Answer: Option (a) is correct.

Explanation:

M1 consists of:

M1 = currency with the public + Check-able deposits + other deposits with RBI

M2 consists of:

M2 = M1 + post office savings bank account

If Joe transfers $1,000 from his savings account to his checking account, then there is a reduction in M2 and increase in M1. We know that M1 is a component of M2, therefore, M2 increases.

Hence, there is no change occur in M2 and M1 increases by $1,000.