Question

Sara withdraws​ $1,000 from her savings account at the Lucky​ S&L, keeps​ $50 in​ cash, and deposits the balance in her checking account at the Bank of Illinois. What is the immediate change in M1 and​ M2? The immediate change is​ ______ in M1 of​ $1,000 and​ ______ in M2.

Answer 1

Answer:

The immediate change is​ an increase in M1 of​ $1,000 and​ no change in M2.

Explanation:

The M1 definition of money includes cash, coin, checkable deposits, and traveler checks. The M2 definition of money includes all the components of M1 and savings account, money market funds, certificate of deposits, and other time deposits.

A withdrawal of $1,000 from savings account will increase M1 by $1,000, as the $50 cash and the rest of $950 in her checking account is added to M1. However, the M2 will remain the same, as the $1,000 in the savings account which is included in M2 goes to cash and checking deposit which is also in M2.