Suppose individuals decide to reduce their holdings of term deposit funds. Further assume that these decisions put funds into current account deposits. Given this information, we know that:
A) the demand for M1 would increase and the demand for M3 would increase.
B) the demand for M1 would increase and the demand for M3 would decrease.
C) the demand for M1 would decrease and the demand for M3 would decrease.
D) the demand for M1 would decrease and the demand for M3 would increase.
E) the demand for M1 does not change and the demand for M3 would decrease.

Question

Quizplus · Accepted Answer

Moving funds from term deposits to current account deposits increases M1 (which includes currency and checking deposits) but decreases M3 (which includes M1 and other deposits like term deposits), as individuals are shifting their preference from less liquid assets (part of M3 but not M1) to more liquid ones (part of M1).

Suppose Individuals Decide to Reduce Their Holdings of Term Deposit