Question

Jane currently has $5,100 in her savings account and $2,000 in her checking account at the local bank.

Instructions: Use a positive number to represent an increase and a negative number to represent a decrease.

a. Suppose she withdraws $350 in cash from her savings account. By what dollar amount does the country's money supply (M1 and M2) change as a result of Jane's actions? Change in M1: $____

Change in M2: $____

b. Now suppose instead that Jane withdraws $350 from her checking account and uses $150 of this money to pay her federal income tax. After that, she uses $140 to buy a set of used golf clubs from her neighbor who deposits it into his checking account. Finally, she deposits the remaining cash from the $350 withdrawal into her savings account. By what dollar amount does the country's money supply change as a result of Jane's actions?

Change in M1:$____

Change in M2:$____

Answer 1

M1-checking deposit traveler check + currency in circulation M2-M1+saving deposit+ time deposit+ money market mutual funds 1. Since Jane had $5100 is his saving account and $2000 in his checking accounts. If she withdraws $350 from his saving accounts. Since she withdraw from saving accounts $350 and it is in the cash form, so M1 increase by $350 but M2 will not be affected because $350 has increased in the form of cash and decreased from saving accounts by the same amount. So the M2 is not affected with this transition. M1 change by $350 M2 change by 0. 2. Since Jane has withdrawn from his checking accounts and out of this sum, she uses $150 for paying income tax to the federal, so this money goes out of M1 and M2. She uses $140 for used golf club and he deposited it into his checking accounts. And Jane deposited $60 in his saving accounts. Hence M1 change by-150-60 (S-210) Ml decrease by (-$210). M2-Change in M1+ ($60) -210+60 --$150 M2 increase by $150 and Ml decrease by S210.