Now suppose instead that Jane withdraws $500 from her checking account and uses $300 of this money to pay her federal income tax
. After that, she uses $120 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 $500 withdrawal into her savings account. By what dollar amount does the country's money supply change as a result of Jane's actions?
a. Money held by individuals in savings accounts is part of the M2 money supply, but not part ofthe M1 money supply. Therefore, when Jane withdraws $500 cash from her savings account,the M1 money supply increases by $500. However, the M2 money supply does not changebecause the M1 money supply is included as part of the M2 money supply.b. Money held by banks and governments is not included as part of the money supply. Therefore,when Jane uses $300 to pay her income tax to the U.S. Treasury, that total of $300 is taken out ofboth the M1 and M2 money supplies. When Jane deposits the remaining cash ($80) into hersavings account, the M1 money supply is reduced by that amount, but it does not affect the M2money supply. Therefore, Jane's actions cause the M2 money supply to change by $300 (theamount used to pay her taxes) and the M1 money supply to change by $380 (the amount used topay her taxes plus the amount that was deposited into her savings account). Note that it does notmatter that Jane no longer has the $120 she used to pay for the gold clubs, as the funds remainsin someone else's checking account. So this amount is neither removed from the M1 moneysupply nor the M2 money supply.NumericResponseDifficulty: 03 HardLearning Objective: 1402 List anddescribe the components of the U.S.money supply.5000380300References
