Question

1. For each of the following, describe the effect (increase or decrease) on M1 and on M2. a) Your grandmother gives you a check for your birthday which you deposit into your savings account. b) Your grandmother gives you a check for your birthday which you deposit into your checking account. c) You transfer money from your checking account to your savings account. d) You find a ten dollar bill on the sidewalk and deposit it into your checking account.

Answer 1

(a) A check deposited in Saving account will not change M1, since M1 excludes savings accounts. But it will increase M2, which includes savings account.

(b) A check deposited in Checking account will increase both M1 and M2, since both include checking account.

(c) Transfer of money from checking account will decrease M1. Since it will increase Savings account by the amount of decrease in Checking account, M2 will remain unchanged.

(d) Since the ten-dollar bill was already included in M1 and M2 (as currency), depositing it into checking account will neither change M1 nor change M2.