Freema withdraws $1,000 from her checking account to purchase a $1,000 time-deposit. JAs a result of her transaction,
A) M1 and M2 decrease.
B) M1 decreases and M2 increases.
C) M1 decreases and M2 is unaffected.
D) M1 and M2 are unaffected.

Question

Quizplus · Accepted Answer

When Freema withdraws $1,000 from her checking account, the amount of M1 (which includes currency in circulation and demand deposits) decreases by $1,000. However, her deposit of $1,000 in a time-deposit does not affect M1, as time deposits are not included in the definition of M1. Therefore, M1 decreases while M2 (which includes M1 plus savings deposits, time deposits, and money market mutual funds) remains unaffected.

Freema Withdraws $1,000 from Her Checking Account to Purchase a $1,000