Question

Donovan's $200,000 CD matures. He deposits $20,000 into his checking account, buys a CD for $150,000,...

Donovan's $200,000 CD matures. He deposits $20,000 into his checking account, buys a CD for $150,000, and puts $30,000 into his money-market mutual fund. How does this affect M1 and M2?

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Answer #1

The 200,000 certificate of deposit falls under M2. So it's maturity and following actions have the below effects

M1 increases by 200000. M2 remains unchanged.

The $20000 into checking account And buying of CD of 150000 and 30000 in mutual fund implies a decrease in M1 by 180000 and M2 remains unchanged.

So

M1 20000

M2 200000

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