Question

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Monetary aggregates II. For each of the following transactions identify by how much M1 and M2 change. (a) (3 points) You receive a check for $2,500 from your employer. You deposit the check into your checking account. You then withdraw $500 as cash and transfer $1,000 into your savings account, and use the remainder to purchase shares of a stock market mutual fund (b) (3 points) Umut has $4 million of funds in a savings account. He moves $2 million of the funds from his savings account into a retail money market mutual fund (RMMMF) account. He then moves $1 million from his savings account to his checking account Answer: (a) Change in M1: $2,000. Change in M2: $1,000. (b) Change in Ml: $1 million. No change in M2

Answer 1

a)

M1 = Currency +Checking Deposit + Traveler Checks.

Deposition of 2500 increases M1 by 2500. But 2000 slips to M2 in forms of transferring to saving account and mutual fund.

So change in M1 = 2500 -500

= 2000 or Cash $ 500 only amount left in M1.

M2 includes M1 + Saving +Time deposits + stock market mutual fund.

Here simply fund has transferred from Checking account to mutual fund and saving fund. So there must not be change in M2.

Earlier M2 =2500

Later = Cash + Saving deposit + Mutual fund

= 500 + 1000 +1000

= 2500

Change = 2500 - 2500

= 0

b)

Checking account is part of M1, so there will be increase of $ 1 Million.

There will not be change in M2, as fund is being transferred from one head to another ones, M1 is part of M2. So there will not be change in M2.