Question

For each of the following transactions, what is the initial effect (increase or decrease) on M1? On M2? a. You sell a few shares of stock and put the proceeds into your savings account. b. You sell a few shares of stock and put the proceeds into your checking account. c. You transfer money from your savings account to your checking account. d. You discover $0.25 under the floor mat in your car and deposit it in your checking account. e. You discover $0.25 under the floor mat in your car and deposit it in your savings account. 2. There are three types of money: commodity money, commodity-backed money, and fiat money. Which type of money is used in each of the following situations? a. Bottles of rum were used to pay for goods in colonial Australia.

Answer 1

Answer: The description are as follows:

Explanation:

Monetary aggregates are as follows:

M1 = Currency with public + Check-able deposits + other deposits with RBI

M2 = M1 + Post office Savings A\c

(a) Selling shares of stocks doesn't affect any of the monetary aggregates, M1 or M2. But depositing the selling amount into savings account have an impact on M2. As savings account is a constituent of M2, which lead to increase in M2 and doesn't have any impact on M1.

(b) Selling shares of stocks doesn't affect any of the monetary aggregates, M1 or M2. But depositing the selling amount into checking account have an impact on both M1 and M2. As checking account is a constituent of M1 and M1 is a constituent of M2, so, this will increase both M1 and M2.

(c) If the amount is transferred from savings account to checking then this will increase the M1 and doesn't change M2. As checking account is a component of M1, so this will increase M1. M2 consists of both checking & savings account, so there is no impact on M2.

(d) Depositing cash into a checking account doesn't impact M1 or M2. Because there is just a transfer of funds from one component of M1 (that is currency with public) to another component of M1 (that is checking account).

(e) Depositing cash into a savings account doesn't have any impact on M2 but it decreases M1. Because there is a fall in the component of M1 (that is currency with public) which will decreases M1. There is no change in M2, as M2 consists of both M1 and Savings account.

Commodity Money is used in a situation where bottles of rum were used to pay for goods in colonial Australia. Commodity money is a money that is used for buying goods. Ideally, there is a trade of a commodity for a commodity.