If you cash a $100 traveler\'s check at a bank, by how much do(es) (a) M1 change
ID: 1131415 • Letter: I
Question
If you cash a $100 traveler's check at a bank, by how much do(es) (a) M1 change? No change Decreases by $100 Not enough information Increases by $100 (b) M2 change? Increases by $100 Decreases by $100 Not enough information No change (c) Bank reserves change? Not enough information Decreases by $100 Increases by $100 No change If you deposit the traveler's check in your bank account (i.e., a transactions account), by how much do(es) (d) M1 change? Increases by $100 Not enough information No change Decreases by $100Explanation / Answer
(a)
Since M1= cash with the public + traveler's check + checkable accounts.
If an individual cash a $100 traveler's check at a bank, then M1 does not change because at the time of cash of $100 traveler check at the bank, $100 decreases from checkable accounts and increase in the form of the cash.
Hence net effect is zero.
Hence option first is the correct answer.
(b)
Since M2 = M1+ saving accounts + small certificate deposits.
Since M1 does not change If an individual cash a $100 traveler's check at a bank. Hence there will be no effect on the M2 also.
Hence option fourth is the correct answer.
Option fourth; No change.
(c)
The bank reserve change by the amount = change in the deposit * required reserve ratio
Hence If an individual cash a $100 traveler's check at a bank, then the change in the bank reserve cannot be calculated with the given information.
Hence option first is the correct answer.
Option first; not enough information.
(d)
Since M1= cash with the public + traveler's check + checkable accounts.
If individual deposits $100 checks in the account of any individual Bank accounts. Then $100 will be transferred from the account of the individual into the accounts of another individual account. It means the same amount has been transferred from one account to another account.
It means M1 does not change.
Hence option third is the correct answer.
Option third; no change.
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