4. Indicate what would happen to both M1 and M2 (increase, decrease, no change)

Question

4. Indicate what would happen to both M1 and M2 (increase, decrease, no change) due to each of the following events. Consider each lettered event to be independent of the others.

a) you write a check for cash at the casino

b) an individual redeems a personal CD and deposits the funds into a savings deposit account

c) U.S. commercial banks use some of their excess reserves to purchase $250 billion worth of U.S. Treasury securities from the Federal Reserve.

d) as the economy improves, banks ease their credit standards and approve a higher percentage of loan applications.

e) you spend $4,000 in U.S. currency while on your spring break trip to Acapulco (if you spent less than that you could not have had much fun)

Explanation / Answer

M1 = Checkable deposits + Cash + Travellers check
M2 = M1+Saving deposits + Time deposits + Certificates of deposit and money market deposits

a) No Change in M1 and M2
b) M1 decreases whereas M2 no change
c) M1 decreases whereas M2 no change
d) M1 increases and M2 no change
e) No Change in M1 and M2, as it is transacted in liquid form

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