Freema withdraws $1,000 from her checking account to purchase a $1,000 time-deposit.
As 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 withdrew $1,000 from her checking account, the M1 money supply (which includes currency in circulation and checkable deposits) decreased by $1,000. However, the M2 money supply (which includes M1 plus savings deposits, money market securities, and other time deposits) is unaffected as the $1,000 was simply transferred from a checking account to a time-deposit account, both of which are considered part of M2.

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