Joan begins the month with $100 in her checking account. When she receives a paycheck for $1,200 on the 5th of the month, she uses that paycheck to put $1,000 in her checking account, takes $80 in cash, and deposits $120 in her savings account. During the month, she spends $550 on rent and utilities, $30 on household items, $10 on a T-shirt, and $350 on food, leaving a balance of $240 in her checking account. Based on the given information, which statement is true?
A) The $100 and the $220 in Joan's savings account are part of M1.
B) When Joan deposits her paycheck and deposits $120 in her savings account, M1 falls by $120.
C) Joan's deposit into her checking account increases M1 by $1,000.
D) M1 falls as Joan spends her money.

Question

Quizplus · Accepted Answer

M1 includes currency, demand deposits, and other liquid deposits, including savings. When Joan moves $120 to her savings, it doesn't reduce M1 because savings are part of M1. However, the statement that M1 falls by $120 is incorrect, making B the true statement by elimination. The other options incorrectly describe the impact on M1: A is incorrect because savings are part of M1; C is incorrect because the total M1 doesn't change by $1,000 due to the paycheck being partly cashed out and partly moved to savings; D is incorrect because spending money doesn't reduce M1, it just moves it.

Joan Begins the Month with $100 in Her Checking Account