For each of the following transactions identify by how much M1 and M2 change. (a

Question

For each of the following transactions identify by how much M1 and M2 change. (a) Your grandmother gives you a check for $250 as a present for your birthday. You deposit the check into your checking account. You then withdraw $50 as cash and transfer $100 into your savings account.) (B) Andreas has $2 million of funds in a retail money market mutual fund (RMMF) account that he wants to close. He uses $1 million from the RMMF account to purchase large-denomination CDs and he transfers another $750,000 into his personal savings account. He moves the remaining funds to his checking account.

Explanation / Answer

M1 = Coins & currency + Checking account

M2 = M1 + Saving account + Money market funds + CD

(a)

Depositing Grandma's check doesn't change M1 or M2, since it's a trasnfer between two checking accounts.

Cash withdrawal doesn't change M1 & M2 since it's a movement from checking account to currency.

$100 transfer to savings account will decrease M1 by $100 & increase M2 by $100.

(b)

RMMF, CDs, checking account and savings account are all components of M2, so M2 doesn't change due to these transactions.

Incraese in M1 = increase in checking account = $(2 million - 1 million - 0.75 million)

= $0.25 million = $250,000

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