If households in the economy decide to take money out of checking account deposits and put this money into savings accounts,this will initially

Question

Quizplus · Accepted Answer

Taking money out of checking accounts and putting it into savings accounts will decrease M1 (that measures the money supply that includes currency, demand deposits, and other checkable deposits) because demand deposits will decrease. However, it will not change M2 (that includes M1 as well as savings deposits, money market securities, and other time deposits) because the funds are still held in deposits, but in a different type of deposit that is classified under M2. Therefore, the correct answer is (C) decrease M1 and not change M2.

If Households in the Economy Decide to Take Money Out