Yolanda took $5,000 from her checking account and put the money in her savings account at the same bank. Based on that information, which of these is TRUE?
A) Both M1 and M2 were reduced by $5,000.
B) M1 went down by $5,000, but M2 was unchanged.
C) Neither M1 nor M2 changed because the transfer was done at the same bank.
D) M1 and M2 both rose by $5,000.

Question

Quizplus · Accepted Answer

M1 is the narrowest definition of the money supply and includes only currency in circulation, traveler's checks, demand deposits, and other checkable deposits. When Yolanda transferred $5,000 from her checking account to savings account, her demand deposits decreased by $5,000, which is a component of M1. Therefore, M1 decreased by $5,000.
M2 is a broader definition of the money supply which includes all of M1 plus savings deposits, money market securities, and other time deposits such as Certificates of Deposit (CDs). When Yolanda transferred $5,000 from her checking account to her saving account at the same bank, the amount of money in savings deposits increased by $5,000. Therefore, M2 was unchanged.

Yolanda Took $5,000 from Her Checking Account and Put the Money