State the immediate effect of each of the following actions on My and M2: Instru

Question

State the immediate effect of each of the following actions on My and M2: Instructions: If there is no change in My or M2, enter zero as your response. a. Barry writes his plumber a check for $160. The plumber takes the check to the bank, keeps $20 in cash, and deposits the remainder in his savings account. M1 rises v by S 20 M2 rises by $ 160 b. Maureen deposits the $800 from her CD in a money market mutual fund M1 does not change by $ 0 M2 rises 7 by $ 800 c. Sylvia withdraws $100 in cash from her savings account. M1 rises by $100 M2 declines by $ 100

Explanation / Answer

When the plumber keeps $20 in cash currency in circulation is increased by 20 Dollars which means M1 is increased by 20. Since the entire amount is a part of savings account as well as M1, M2 increases by whole 160.

Now money market Mutual Fund is a part of M2 and so is the certificate of deposit. This indicates that M1 does not change. At the same time M2 is also unchanged because the money is transferred from certificate of deposit money market mutual fund both are a part of M2.

In the third case there is a transfer of hundred dollars from saving account to currency in circulation. Therefore M1 is increased by 100 and M2 does not change. This is because the money is transferred from savings account to currency in circulation, both being a part of M2.

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