Question

Determine if the following changes affect M1 and/or M2 and which way:

a) There is a decrease in total savings deposits in the economy

b) Household shift some of their savings from money market deposits to savings deposits

c) Households deposit some of their currency holding into checking deposits.

d) Households convert some of their time deposits into currency.

Answer 1

M1=Currency+ + traveller’s checks+ transaction deposits

M2=M1 + saving deposit, including money market deposit accounts +small time deposit+ Moneymarket funds held by individuals.

a) There is a decrease in total savings deposits in the economy

Since saving deposit is part of only M2 and not the M1, so M2 will decrease but M1 remain unaffected.

b) Household shift some of their savings from money market deposits to savings deposits

Since saving deposit and money market deposit are part of M2 only, so transfering some amount from saving account to money market deposit account neither affect M2 nor M1.

c) Households deposit some of their currency holding into checking deposits.

Since currency and checking deposits are part of M1, so by depositing some currency will not affect the M1. Since M1 is part of M2, so M2 will not be affected.

d) Households convert some of their time deposits into currency.

Since time deposit is part of M2 only, so with this currency will increase. Hence M1 will increase. Since time deposit and currency are part of M2, so transfering money from time deposit to currency will not affect M2.