Question

Suppose Megan withdraws $75 from her savings account and deposits it into her checking account. This transaction causes M1 to:______
A. Increase by $75 and M2 to remain the same.
B. Decrease by $75 and M2 to remain the same.
C. Increase by $75 and M2 to decrease by $75.
D. Remain the same and M2 to increase by $75.

Answer 1

Answer:

A. Increase by $75 and M2 to remain the same.

Explanation:

savings deposits, along with money market securities, mutual funds, and other time deposits are considered near money which are added to M1 to get M2

M1 will be the currency, checking account, traveler check and other wich are the most liquid form of cash.

Thus, the money supply M2 will be the same as the money went into M1 which is included in M2

and M1 increases by 75 as this cash wasn't included before.